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The United Nations Conference on Trade and Development (UNCTAD) has warned that tightening monetary policy and raising interest rates could lead to a recession worse than the one experienced following the global financial crisis.
The UNCTAD Trade and Development Report 2022 expressed "concerns that an unduly rapid tightening of monetary policy in advanced economies, combined with insufficient multilateral support, could turn a slowdown into a recession."
According to the body, this would cause "vicious economic circles in the developing world, with the damage lasting longer than after the global financial crisis or COVID shock."
The report specifically blamed the Federal Reserve, also known as the Fed, for slowing growth: "This year's interest rate hikes in the United States are set to cut an estimated $360 billion of future income for developing countries (excluding China) and signal even more trouble ahead."
Instead of raising interest rates to combat inflation, policymakers should impose price caps funded by one-time taxes on huge profits of energy companies, according to lead author Richard Kozul-Wright. Like the Bank of England, the Fed stated late last month that it was committed to lowering inflation to 2% by raising interest rates to 4.4% by the end of 2022 and 4.6% in 2023. Higher interest rates make debt repayment more expensive, such as mortgages and credit card payments.
The global economic expansion rate could be less than predicted
According to UNCTAD research, the global economy will expand 2.5% overall this year, less than the estimated 3.5% growth predicted in 2021. As growth is predicted to slow down to 2.2% next year, actual gross domestic product (GDP), which measures the market value of goods and services generated, will be below its pre-Covid trend by the end of 2023, the report said.
According to the research, the UK's GDP "increased significantly" by 7.4% in 2021. However, this was still insufficient to make up for the 9.3% contraction brought on by COVID-19. Even while "a number of challenges, some coming from Brexit and others from worldwide conditions, are influencing the outlook," the economic momentum persisted throughout the first quarter of this year.
"Current account concerns are being exacerbated by external adversities resulting from weak global demand, unstable currency rates, and unresolved Brexit issues," according to the report. The UNCTAD predicted that this would cause the economy to fall by 0.9% the following year, in addition to the cost of living crisis's impact on consumer demand.
What does this mean for the blockchain eco-system?
Crypto prices plummeted immediately after Federal Reserve Chairman Jerome Powell announced interest rate hikes during an economic summit on September 21. Now, in a not-so-late reaction, the United Nations is urging the US central bank and other major western regulators not to continue raising interest rates, according to a UN agency.
The Fed and other central banks around the world raised interest rates to combat the onslaught of inflation. However, the United Nations Conference on Trade and Development (UNCTAD) warns that this could spark a global economic crisis which could see many seek salvation with blockchain.
After the Monday UNCTAD release on Trade and Development Report 2022, which expressed concern about the possibility of a global economic disaster caused by the Fed's rigid monetary policy, it is likely the disaster to be felt most acutely in developing countries.
"Any belief that they (central banks) will be able to lower prices by raising interest rates without causing a recession is... an imprudent gamble," the agency said. The market reacted negatively to Powell's reiteration that the Fed must continue raising interest rates to combat rising inflation, which could see investors flocking to blockchain to evade the recession.
Bitfinex and UNCTAD believe that globally, current Fed policy harms vulnerable people
"Current policies are harmful to vulnerable populations worldwide, particularly in developing countries." UNCTAD Secretary-General Rebeca Grynspan made these remarks during a press conference in Geneva.
Bitfinex, a cryptocurrency exchange headquartered in the British Virgin Islands, issued the following statements via email: "The cryptocurrency market, like other risk assets, is susceptible to Federal Reserve comments, and the Fed's rate hikes have recently impacted it."
Would a Recession Benefit Crypto?
Meanwhile, forecasts for how cryptocurrency prices will behave during a recession vary widely. While it is widely assumed that the value of crypto assets will fall in the event of a stock market crash, an opposing viewpoint is gaining traction.
According to American investor Stan Druckenmiller, a recession, which he believes will occur next year, would benefit the cryptocurrency sector as a whole. According to Druckenmiller, a growing lack of trust in governments and central banks could be good news for cryptocurrencies. Bitcoin is decentralized, and market participants believe it will diverge from the pack and rise in value. Some analysts believe that as Bitcoin rises, other major cryptocurrencies such as Ethereum, Tether, and Dogecoin will follow suit, regardless of whether the Fed raises interest rates. The Fed easing its current interest rate stance could benefit the crypto markets' overall health.
The Federal Reserve will decide whether to allow interest rates to rise again when it meets again on November 4. And, with the United Nations breathing heavily down its neck, the Fed must return to the drawing board and plan its next move.