04.07.202209:56 Forex Analysis & Reviews: Central banks monetary policy to result in stagflation

The Federal Reserve's monetary policy, which involves aggressive rate increases combined with balance sheet cuts, is aimed at achieving price stability by reducing inflation.The Federal Reserve believes that it can effectively reduce inflation without causing a recession. That is one of the possible outcomes. At best, achieving this goal will be extremely difficult. At worst, it will be impossible.The geopolitical situation in Ukraine has had a profound effect on commodity prices, supply chains, inflation and a sharp decline in economic growth.The consequence of the tense geopolitical situation in Ukraine is that the Federal Reserve can only influence core inflation. This does not lead to a serious real decline in inflation and economic recession.Thus, the key risk to the global economy is the possibility that inflation will remain persistent and high along with reduced economic growth, which is the definition of stagflation.Inflation remains extremely elevated worldwide at the moment. The European Union reported on Friday that inflation hit a new record in June.Overall inflation in Europe stood at 8.6% year-on-year, surpassing the US inflation rate of 8.3%, according to the CPI data for May. Inflation in advanced economies is now at its highest level in the last 40 years.Real gross domestic product (GDP) rose to 5.7% in 2021. However, much of the global growth that occurred in 2020 and 2021 was supported by worldwide fiscal and monetary policy measures. As this method is no longer effective, economic growth is expected to fall to 2.9% in 2022. The cause for alarm is the high probability that global growth will continue to decline with little change in 2023.On Friday, the Brookings Institution said in a study that the current economy was similar to the 1970s.This study indicates that the current supply shock has occurred after prolonged monetary policy easing led to put-up demand.According to the study, the world economy faces problems similar to the oil shocks of 1973 and 1979-80. The report concludes that, as in the 1970s, the world economy may suffer from stagflation.There are several possible outcomes from global central banks and the Federal Reserve's tightening of monetary policy. Their aim is to successfully reduce inflation simultaneously. Although this is a desirable outcome, it will not be easy to achieve.Their actions could lead to sustained and high inflation combined with economic stagnation.If the global economy faces a period of stagflation, it will cause a strong bullish tone for gold prices. This can be seen in Friday's movement in the gold price. Gold traded near the low of 1784, 35, and ended the day trading at $1809, indicating a dynamic reversal and a possible key reversal.