US Monetary Policy Adds to Woes of Global Economy: Gaballah

The U.S. Federal Reserve's continuous hikes of interest rates have added to the woes of the global economy, with the developing countries the most impacted, said Waleed Gaballah, a member of the Egyptian Association for Political Economy, Statistics and Legislation.

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The Fed has raised rates 11 consecutive times since March 2022 until they reached a range between 5.25 percent and 5.50 percent, bringing interest rates to their highest levels in about 22 years.

Despite all these hikes in the name of curbing inflation, the annual inflation rate in the U.S. came in at 3.7 percent in September, which remains well above the Fed's 2 percent target.

The elevated interest rate has constituted a capital siphon effect on the global economy, leaving many vulnerable countries a dollar shortage, soaring inflation, and a collapsing economy.

"The U.S.'s continuous raising of interest rates causes major problems not only for developing countries but also for the global economy," the Egyptian economist said, adding that such monetary policy could contain inflation resulting from an increase in the money supply, but it cannot absorb inflation resulting from the rising cost of production elements.

Therefore, the Fed's approach to raising interest rates has lowered inflation to some extent, but it will not achieve its goal because the persistent inflation in the United States is caused by the rise in oil and gas prices and the costs of other production elements.

Washington's focus, which is solely on monetary policy to contain inflation without taking what is necessary to reduce the cost of factors, is wrong, he said.

Gaballah stressed that the U.S. monetary policy at this stage is causing many problems for countries in the world, as the rate hikes in the U.S. has led to the withdrawal of hot money (foreign investments in government debt instruments) from emerging economies.

He noted that for investors in the United States and other markets, the high interest rates hamper their access to moderate-cost financing that helps them invest.

"This made investors reluctant to expand their investment, which affected the volume of supply in global markets... this created great difficulty, raised inflation rates in countries around the world, and deepened the wounds of the global economy," Gaballah said.

Gaballah also mentioned that Egypt was harmed by the U.S. monetary policies, which have caused the fleeing of more than US$20 billion in investments in government debt from Egypt.

He called on developing countries to establish early warning systems to limit the growth of the finance sector beyond the size of the real economy to avoid crises.

"Local economic policies should have a role in predicting and preventing monetary crises before they occur," Gaballah noted.