The global economic outlook deteriorated sharply in the second quarter, says AllianceBernstein’s ‘2022 Economic Outlook.’ It notes that inflation remains persistent in the west, with few signs that meaningful moderation is imminent. This gives central bankers no choice but to respond with aggressively tighter monetary policy. The U.S. Fed has raised rates by 150 basis points (bps), the Bank of England by 125 bps, and the European Central Bank is set to start a tightening cycle next month. Tighter monetary policy means slower growth as growth typically feels the impact of tighter policy before inflation does. Not surprisingly, financial markets are increasingly concerned that higher rates will lead to a recession because central banks aren’t in a position to respond to slower growth until inflation eases. While this outcome isn’t a certainty, the probability of meaningfully slower, or even negative growth, has increased materially in recent months as inflation has stayed high.
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