Shoots take root: On Fed hike

The rate increase by the Fed indicates that the world’s largest economy has gained traction

Published - June 16, 2017 12:05 am IST

The biggest takeaway from the U.S. Federal Reserve’s decision to raise the federal funds rate, for a third time in six months, is its assertion that growth in the world’s largest economy has gained traction and is on course to warrant further “gradual” rate increases. Fed Chair Janet Yellen emphasised the factors underpinning this rebound in economic activity — an “ongoing improvement in the job market and relatively high levels of consumer sentiment and wealth” that have spurred household spending, an expansion in business investment, and most significantly, a global pickup in demand. This offers more reassurance that the global economy may have finally re-emerged from the post-financial crisis doldrums. It is also noteworthy that the economic revival has been happening amid heightened policy uncertainty worldwide, especially in key areas like trade, as political tumult continues to roil the U.S. under the Donald Trump administration and, more recently, the U.K. as well. And while Ms. Yellen reiterated that the American central bank remained on alert in monitoring inflation developments, given a recent softening in price gains, the Fed’s decision to announce the contours of a programme to gradually pare the size of its $4.5 trillion balance sheet is another sign that the U.S. economic engine is warming up. India’s exporters can take heart that demand in one of the largest markets for their goods and services is likely to continue to strengthen in the coming months. The Fed also bumped up the median projection for U.S. economic growth in 2017 to 2.2%, from 2.1% forecast in March.

Ms. Yellen and her colleagues on the Federal Open Market Committee have also done well to ward off a 2013 ‘taper tantrum’-like scenario by flagging the projected path of balance sheet normalisation — a deliberate and clearly calibrated set of reductions that increase over time — without detailing a schedule for the start of the process. Clearly spelling out that the plan to decrease reinvestment of principal payments from asset-backed and Treasury securities is conditional on the economy staying its anticipated course, the Fed has earmarked this year as the broad time frame for its start. India’s monetary authorities can derive some reassurance that they are not alone in adopting a policy stance that seems counter-intuitive to some in the light of slowing inflation in their respective economies. While the Fed describes its stance as “accommodative” to spur further strengthening in labour market conditions and a sustained return to 2% inflation, the Reserve Bank of India has said that its “neutral” poise is intended to continue support for economic expansion while ensuring price stability. The common theme is the welcome emphasis on consistency and stability in the messaging.

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