Mixed views on global economic outlook amid rising inflation and volatile markets

The global macroeconomic outlook continues to fluctuate amid growing uncertainties, pronounced monetary policy tightening and roiling financial markets. On 15 June, the Federal Reserve hiked its main policy rate by 0.75 percentage points—its largest increase in 28 years. The rate hike was higher than had been expected which caused turbulence in bond markets in June, with rising yields (declining prices) of long-term government bonds with high volatilities.

The fluctuating long-term bond yields reflect mixed views on inflation. In the United States, inflation expectations in relation to the effectiveness of monetary tightening vary. Some experts argue that a milder monetary tightening will suffice to contain inflation.   The growing number of economic indices in June suggests the US economy is weakening rapidly, which may reduce inflationary pressures.

In addition, wage growth remains below inflation rates, indicating that the real average income has already been declining. This negative income effect may discourage consumption expenditures and weaken inflationary pressures.

Another view insists on a more substantial tightening of monetary policy to control inflation. The US economy may still be robust due to the solid household balance sheet with low leverage. Furthermore, the current level of wage growth can still develop into a wage-price spiral since the negative income effect alone may not suffice to curb growing inflation expectations.

The US dollar bond markets are likely to remain volatile in the near term as market participants remain divided about whether monetary tightening would rein in inflation. The turbulent bond market in the United States poses significant challenges to developing countries, especially to those highly vulnerable to any additional external shock. The international community must accelerate support for these vulnerable developing countries, particularly the least developed countries, where turbulences in developed countries’ financial markets could negatively affect their financial conditions and growth prospects.

Learn more in the July Monthly Briefing on the World Economic Situation and Prospects