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With inflation raging, the US Federal Reserve had little choice but to continue with the hawkish tone that came into vogue at the Jackson Hole conference. The Federal Open Market Committee unanimously delivered a 75 basis points rate hike, the third in a row in 2023. With this, the Fed fund rate has moved up to 3-3.35 per cent, the highest since January 2008.
To be sure, there are more in the offing. The revision in median rates for end- 2022 to 4.4 percent from 3.4 percent estimated in June, indicates cumulative rate hikes of another 125bps, at the least, over the next two meetings this year.
This is not surprising. Note that huge rate hikes in the last two meetings have done little to rein in inflation. In fact, core inflation on a three, six, and twelve-month trailing basis remain sticky at 4.5-4.8 percent. Worse, it is seen to be spreading beyond food and energy prices. A robust labour market and wage hikes are not comforting signs.
Therefore, Fed chairman Jerome Powell’s pledge to quell inflation regardless of “pain” may be justifiable. That too, given that he and the FOMC are already drawing flak for being too late in recognising the scale of domestic inflation.
His commitment to get inflation back to 2 percent, a big ask in the near term, only underscores restrictive policies. “No one knows whether this process will lead to a recession or if so, how significant that recession would be,” Powell stated to reporters, after the rate hike announcement.
Powell’s rhetoric is now making the rest of the world jittery of slipping into recession. This FT article (free to read for MCPro subscribers) tells how rising borrowing costs in the US can result in spillover effects for other countries. Given surging costs in the UK and Europe, the days ahead would have more rate hikes being delivered by central banks of these countries.
That financial markets would be volatile is a no-brainer. Beginning with the Dow that closed lower after the rate hike on Wednesday, Asian indices including India’s Nifty and BSE Sensex are trading lower. Besides, as the US dollar index strengthened, other currencies wobbled under pressure.
Note that the rupee hit a record low of 80.6 to the USD. Next week, it’s the turn of the Reserve Bank of India to be in the spotlight. While it may not have as big a problem as the US Fed on the inflation front to deal with, the country's forex reserves are dwindling.
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Vatsala KamatMoneycontrol Pro