World Bank: Fed's inflation fight could lead to global downturn

hasn't caused a US recession yet, but a World Bank report released Tuesday shows the US central bank's actions could have economic consequences well beyond its borders.showing a 72% chance policymakers hold steady.in a little over a year, though inflation still remains above the 2% target. In May, the Fed's Federal Open Market Committee increased its benchmark rate by 0.25 percentage points, pushing the federal funds rate to a target range of 5%-5.25%.

These findings come amid the World Bank's projection that the global economy is in a"precarious state" as rising interest rates decelerate consumer spending and business investment. This suggests a more unstable financial system facing a slowing estimated global growth rate of 2.1%, down from 3.1% last year.

Reaction shocks, defined as interest rate changes following shifting market perceptions of the Fed's views on fighting inflation, could have particularly costly effects on EMDEs. Reaction and inflation shocks can lower equity prices and depreciate currencies. Currency depreciation could lead to greater costs for food and other imports.

Fed policy will likely remain tight as it tries to bring inflation down, and this spillover may occur amid unprecedented high levels of debt in many EMDEs. Nearly 60% of low-income countries are either in or at high risk of debt distress, according to the report.

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