US Stocks Hit Record High Amid ECB Chief's Warning of Depression-Like Pressures

Two days after the Federal Reserve cut interest rates by 50 basis points, propelling the US stock market to a record high, the President of the European Central Bank warned that the global economy is facing pressures from "economic nationalism," the collapse of global trade, and the Great Depression of the 1920s.

Speaking at the International Monetary Fund in Washington on Friday, Christine Lagarde noted: "We are facing the worst pandemic since the 1920s, the most severe conflict in Europe since the 1940s, and the most serious energy shock since the 1970s."

She added that these disruptions, coupled with supply chain issues and other factors, have permanently altered global economic activity.

Lagarde observed some similarities between the two twenties— the 1920s and the 2020s— particularly in terms of "setbacks to global trade integration" and "technological advancements."

She pointed out that while monetary policies of the past exacerbated the economic crisis, with the gold standard causing deflation and a banking crisis, today's policymakers possess a stronger ability to respond to structural changes.

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Lagarde emphasized that historical lessons show that fixed exchange rates and pegging currencies to gold are not wise moves.

Past policies pushed the global economy into deflation, exacerbating the recession and even fostering economic nationalism.

She stated that today, central banks' tools for maintaining price stability "have proven to be effective."

Especially after the interest rate hikes in 2022, inflation rapidly declined.

Despite the Russia-Ukraine conflict, supply chain disruptions caused by the pandemic, and rising energy prices driving up inflation, central banks have successfully controlled inflation and avoided rising unemployment rates in less than two years.

Lagarde noted that the annual inflation rate in the eurozone fell from a peak of 10.6% in October 2022 to 2.2% in August 2023, the lowest point in three years.

She remarked that central banks have managed to avoid significant deterioration in employment while dealing with high energy prices, an achievement that is "remarkable."

"When central banks raise interest rates to counter high energy prices, it is difficult to avoid a significant deterioration in employment conditions.

But since the end of 2022, the number of employed people in the eurozone has increased by 2.8 million."

However, she warned against complacency, as globalization faces challenges, partial disintegration of supply chains, the market power of tech giants, and the rapid development of artificial intelligence will continue to test policymakers.

Lagarde stated that the uncertainty for monetary policymakers will "remain high," and the European Central Bank will delve into these issues in the upcoming strategic review.

Although the 2% medium-term inflation target will not change, the central bank will learn from past experiences to better manage risks and optimize inflation assessment and risk disclosure.