Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our s each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Federal Reserve Chair Jerome Powell has learned to accept that fighting inflation comes with collateral damage. At this point, it also means unleashing hell on the global economy. The Fed’s aggressive push to bring down prices and cool overheated U.S. markets is wreaking havoc on similar efforts under way at central banks across Europe, Asia and the developing world, write our Victoria Guida and Johanna Treeck. From Victoria and Johanna: “Powell’s actions have caused a flood of money to flee the shores of other countries for safer American investments that offer a much more attractive payoff because the U.S. now has its highest interest rates since 2008. A stronger dollar means the cost for Europeans of heating their homes and powering their cities, already driven sky high by Russia’s invasion of Ukraine, is getting even greater. And smaller developing countries could begin to drown in ever-more-burdensome debt payments… “Most central bankers, too, are locked in their own fights with inflation, so they understand the Fed’s resolve; indeed, price stability in the U.S. also benefits the rest of the world. But with the heightened threat of global recession, one of the largest risks looming from the Fed’s actions is that other central banks might soon feel pressure to cut rates as their economies contract. They’ll have a harder time doing so, however, because that would drive even more precious capital to American markets. ‘We might enter a phase in which we run the risk, just because of the fear of financial volatility, of going against the Fed,” said Alejandro Werner, a former official of the Mexican government and of the International Monetary Fund. “Central banks in Latin America and other emerging markets could be much more cautious in loosening their monetary policy stance and inject some additional recessionary forces.” The Fed is certainly paying attention to all of this , but it likely won’t have much bearing on what it does next. “Will that stay the Fed’s hand? Probably not,” Steven Kamin, who led the Fed board’s international finance division until 2020, told Victoria. “They’re pretty single-mindedly focused on inflation.” It’s not as though Powell & Co’s work is about to get any easier. The Commerce Department will release its monthly report on consumer prices this morning and the consensus is that inflation is still white hot. Economists estimate core inflation — which excludes energy and food prices — jumped by 0.5 percent in August, a big spike compared to the 0.1 percent increase notched in July. Year-over-year core inflation is expected to have risen 4.7 percent last month, up from 4.6 percent for the 12 months ending in July. The Fed signaled last week that it’s on track to push the federal funds rate well above 4 percent by the end of the year. If Commerce’s personal consumption expenditures data reflects those estimates — it’s the Fed’s preferred metric for measuring inflation — there will be even less incentive for Powell to soften his stance. That doesn’t bode well for the rest of the world, according to EY Parthenon Chief Economist Gregory Daco. “Elevated global financial market volatility, plunging currencies and surging bond yields are important considerations for policymakers to weigh in the context of this historic tightening cycle as it could lead to a much sharper global economic slowdown than currently priced in,” Daco wrote in a note on Thursday. “Lest we forget, the US economy is not immune to global waves of uncertainty, as these often wash up on US shores.” IT’S FRIDAY — And Barry Bonds is still the one true home run king. What else should we be writing about? Send us your tips, story ideas, questions or feedback at kdavidson@politico.com and ssutton@politico.com.
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