Central bank rate-hiking may bring on a recession, unemployment and debt defaults. Some say that’s just the price of suppressing inflation.

Just when the world economy seemed to be emerging from the worst of last summer’s pandemic-induced recession, signs of inflation started to appear. In February, Russian forces invaded Ukraine, wreaking havoc with markets, particularly for core necessities such as food and energy. Now, with leading central banks notching rate hike after rate hike, many economic observers say a worldwide recession is increasingly likely.

“Risks for the fall are on the downside,” says Andrea Presbitero, a senior economist in the research department of the International Monetary Fund (IMF). “Even correcting the long term for the negative shocks of the financial crisis and the Covid pandemic, the global outlook remains weak.”

In late September, the United States Federal Reserve (the Fed) announced its fifth rate hike for the year, 0.75%. The Bank of England (BoE) followed the next day with its own 0.5% rate hike, forecasting inflation to rise to 11% in October before subsiding. The UK economy is already in recession, the Bank proclaimed.

In July, the IMF cut its April global growth estimate for 2022 by almost half a point to 3.2%. The downward revision particularly affected China, down by 1.1% to 3.3%; Germany, down by 0.9% to 1.2%; and the US, down 1.4% to 2.3%. Three months later, even these estimates are starting to look optimistic.

Major macroeconomic forces at play over the coming year include lingering Covid impacts, ongoing energy-supply issues (including short-term efforts to replace Russian supplies and the longer-term push to replace fossil fuel supplies), supply sourcing, heinous debt, and political unrest due to severe inequality. Increasing debt and political unrest, in particular, relate to central bank tightening: Higher rates punish debtors, and sovereign defaults are already at record highs.

“The general picture is that the world is probably sliding into another global recession,” says Dana Peterson, chief economist at the Conference Board research group. “Is it going to be deep, like the pandemic-related recession? No. But it may be longer.”

For many, an economic downturn is simply the cost of containing inflation. “Without price stability, the economy does not work for anyone,” Fed Chairman Jerome Powell said in a late August speech. “Reducing inflation is likely to require a sustained period of below-trend growth.”

Pressed by US Senator Elizabeth Warren, Powell had earlier acknowledged that the Fed’s tightening could increase unemployment and even bring on a recession. Warren and others argue that higher interest rates will suppress growth without addressing the true causes of the current inflation. “Rate hikes won’t make [Russian President] Vladimir Putin turn his tanks around and leave Ukraine,” Warren noted during a June Senate banking committee hearing. “Rate hikes won’t break up monopolies. Rate hikes won’t straighten out the supply chain, or speed up ships, or stop a virus that is still causing lockdowns in some parts of the world.”