Support and opposition
A number of prominent voices are speaking out in response to these events. Some are encouraging the central banks to continue to combat inflation, while others are arguing that the restrictive policies are ineffective at best and destructive at worst. Politicians and institutional leaders (current and former) are weighing in, as are economists, writers and many more besides.
On 27 August, at an annual gathering for central bankers in Jackson Hole, German economist Isabel Schnabel, a monetary hawk, said that "sacrifices" need to be made, and that rising prices must be combated "even at the risk of lower growth and higher unemployment." Joachim Nagel, president of the Bundesbank, expressed similar views a few days later, on 31 August: "We need a strong rise in interest rates in September. And further interest rate steps are to be expected in the following months," he warned. On 7 October, Kristalina Georgieva, managing director of the International Monetary Fund (IMF), reinforced this point: "The central banks need to stay the course and do more" to combat persistent inflation, she said in an interview with Agence France-Presse.
Outside of official bodies, Paul Krugman, winner of the 2008 Nobel Prize in Economics, who is usually a proponent of accommodative monetary policies, said at a conference organised by the ECB that he too is in favour of higher interest rates, invoking the "precautionary principle". Economist Jean Pisany-Ferry summarised these positions in the French business newspaper Les Echos on 19 September: "No economic model advises having a key interest rate around 1% when inflation is close to 9%."
In the other camp, several former or current leaders are voicing their scepticism. In an essay published in mid-September by the Peterson Institute for International Economics, Maurice Obstfeld, former chief economist of the IMF (until October 2018), warns: "The present danger [...] is not so much that current and planned moves will fail eventually to quell inflation. It is that they collectively go too far and drive the world economy into an unnecessarily harsh contraction.”
Within the official sphere, criticism came from of the head of European diplomacy Josep Borrell, on 10 October during a speech to EU ambassadors, leaving an impression: "Everyone has to follow the rate hikes decided by the Fed, otherwise the currencies will be devalued against the dollar," he stated. "Everybody is running to increase interest rates, and this will bring us to a global recession."
The United Nations Conference on Trade and Development (UNCTAD) also voiced its concerns in a statement dated 3 October, warning of a global recession induced by current monetary policies. Vitor Constancio, a former member of the ECB’s Executive Board and an active Twitter user, is also calling for prudence and progressiveness. The Portuguese economist is critical of the ECB’s action and says that interest rates are not a suitable instrument for responding to supply shocks such as the EU’s current energy crisis, and that this policy will not have an impact on energy prices or the prices of goods containing imported components.
In the same vein but in more vindictive language, French writer and economist Jacques Attali drove the message home in an article dated 7 September: “Today’s inflation has no monetary origin; to try to curb it by raising interest rates, as central banks are doing and will continue to do, is suicidal. All in all, this will lead to a downward balance of supply and demand, dragging the economy into a recessionary spiral, when what is needed is a massive boost to investment in the sectors of the future, with very low interest rates.”
This line of reasoning is starting to resonate across the Atlantic, even though the respective situations of the EU and the US are not comparable. In an open letter dated 10 October, Cathie Wood, star investor and founder of the investment management firm Ark Invest, says the Fed is making a serious policy error that will cause deflation. She argues that the Fed is focusing on employment and inflation, both of which are lagging indicators, and that it should instead be focusing its attention on soaring commodity prices.