Hamas’s “horrifying attack” on Israel , according to the head of the US Federal Reserve, could derail the recovery of global economies.
Jerome Powell, the chairman of the Federal Reserve Board, said that policymakers are “proceeding with caution” and suggested recent turmoil on the bond market may limit the need for rate increases.
Powell, speaking in New York said that it is too early to assess the full impact of the war between Israel & Hamas because countries are only beginning to count the human and economic costs.
Economists warn that a prolonged conflict in the Middle East may keep inflation high despite rising oil prices and weak economic growth.
Powell stated: “Geopolitical risks are high and present a significant risk to global economic activity.” Federal Reserve’s institutional role is to monitor the economic implications of these developments, which are still highly uncertain.
“I found the attack against Israel horrific, and the prospect of more innocent lives being lost is horrifying.”
On Thursday, financial markets were impacted by fears about the Middle East situation and the possibility of higher interest rates for longer periods.
The FTSE 100 index closed at 1.17pc while Hong Kong’s Hang Seng fell by nearly 2.5pc.
The yield on US 10-year bonds hit a new 16-year-high, and is now closer to 5pc – a psychologically significant level – as long-term borrowing rates in the US continue to increase.
Powell called the recent rise in US borrowing costs “significant”. He also said that if sustained, higher interest rates on long-term loans could substitute for future Fed rate increases.
His comments add to the growing chorus of concern about the state of the global economic system as countries struggle with rising borrowing costs and exploding debt.
The International Monetary Fund’s (IMF) head described the Israel-Hamas conflict as a new cloud on the horizon, which threatens to further darken the already gloomy global economic outlook.
Kristalina Georgeeva stated that severe shocks are becoming the “new normal” in an economic environment dominated by slow growth.
IMF downgraded their outlook once again, predicting that world economic growth will slow from 3.5pc by 2022 to only 3pc for this year and then 2.9pc by 2024.
Mr Powell said on Thursday that the tightening of monetary policy has already “put downward pressure on economic activities and inflation”, and that it is yet to feel its full impact on businesses and households.
Fed policymakers have voted to keep rates unchanged between 5.25pc and 5.5pc . Officials predict that rates will increase again this year.
Powell stated that the financial markets “tightened considerably in recent months”, and added: “Longer term bond yields were an important factor in this tightening.” We are attentive to these changes because they can affect the direction of monetary policies.
He did not exclude the possibility of further rate increases, given a robust jobs market. However, he indicated that borrowing costs would likely remain high for longer.
Powell stated: “Given all the risks and uncertainties, as well as how far we’ve come, our committee is proceeding with caution.”
Further evidence that the growth rate is above trend or tightness on the labour market has not eased could threaten further progress in reducing inflation and warrant tightening monetary policy.
Mark Carney, former Governor of the Bank of England predicted that the Fed will be forced to increase interest rates once again.
He said: “I anticipate that the Fed will tighten up a little bit, and probably increase rates this year.”
“It was a long time before some central banks fully recognised [inflation] or started to act. When they began to act, and in particular when the Fed took action, it responded very effectively. It always surprised people by how resolute and what it was willing to do.”
He said that despite rate increases, the risk of a recession was decreasing. “The Fed did a very good job,” said Mr Carney.