New Fed Communication Agency: Why is the global economy still growing rapidly despite central banks' desperate efforts to raise interest rates?

Why hasn't economic growth and inflation slowed further since global central banks raised interest rates?

According to an article published by Nick Timiraos and Tom Fairless, journalists known as the "New Fed Communications Agency" at The Wall Street Journal, the main reason is the impact of the COVID-19 pandemic and the longer time needed for central banks to curb economic activity through interest rate hikes. In addition, the historically rare tight labor market has driven wage increases and consumer spending.

First, they point out that the economic recession and subsequent recovery caused by the COVID-19 pandemic are unusual, weakening the effectiveness of interest rate hikes. In 2020 and 2021, governments in countries such as the United States provided trillions of dollars in fiscal aid to households, and these households also had some savings due to the pandemic breaking their original spending patterns. At the same time, the central bank's low interest rate policy allows businesses and consumers to lock in lower borrowing costs.

Moreover, in recent months, households and businesses have continued to spend on a large scale. Although households have used their savings, stable income growth has replenished those savings. Due to labor shortages and huge profits caused by the pandemic, businesses are recruiting non-stop.

"Many internal forces in the pandemic era are hindering contractionary policies," said Tom Barkin, president of the Richmond Fed, to The Wall Street Journal last week.

Secondly, the government's "water collection and release" behavior has buffered the impact of interest rate hikes on the economy, resulting in a less-than-expected slowdown in economic growth.

Take Europe as an example. Under the influence of the energy crisis, Europe fell into a shallow recession in the winter, but ultimately avoided the deep recession predicted by some analysts. At that time, governments in various European countries promised to provide up to $850 billion in fiscal aid.

In the United States, stimulus policies have also provided more impetus to the economy. President Biden's infrastructure plan approved in 2021 will provide support of around $1 trillion, and two bills signed last year provided hundreds of billions of dollars to promote renewable energy production and semiconductor manufacturing.

In addition, interest rate hikes may take more time to spread to all corners of the economy and cool economic growth and inflation. The Bank of England raised interest rates from near-zero levels for the first time in December 2021, while the Fed and the ECB began raising interest rates in March and July 2022, respectively.

Timiraos and Fairless cited some analyses that the first two-thirds of the Fed's interest rate hikes only restored interest rates to the level where they were no longer stepping on the accelerator, while the last third was equivalent to stepping on the brakes to slow down the economy. Atlanta Fed President Raphael Bostic wrote in an article published last week that contractionary policies limit economic growth for only eight to nine months.

They believe that central banks such as the ECB may not have done enough to curb demand and need to raise interest rates further.

The situation in the United States is even more complicated. On the one hand, the labor market began to show signs of slowing down in May, and overall inflation has decreased significantly, while on the other hand, core inflation is relatively sticky, causing headaches for the Fed. In mid-month, Timiraos quoted analysts as saying that the Fed's June meeting decided to keep interest rates unchanged, but it is expected to further raise interest rates in the future, indicating a greater possibility of a rate hike in July. Austan Goolsbee, President of the Chicago Fed, believes that if interest rates do not rise by 500 basis points within a year, a "boulder" may fall on the United States.