Federal Reserve Chair Janet Yellen has made clear that the U.S. central bank is preparing for its next interest rate increase amid signs that a consumption-led expansion in the world’s largest economy is gaining traction, albeit at a moderate pace. While stopping short of indicating a time frame for the move, Ms. Yellen referred to the steady improvement in the domestic labour market, with expectations of both further job gains and moderate growth in real GDP, as bolstering the case for the Fed to raise borrowing costs for the first time since December last. With U.S. benchmark interest rates having hovered close to zero for almost a decade, some economists and central bankers, including the Reserve Bank of India’s Raghuram Rajan, have openly questioned the efficacy and long-term impact of “ultra-low rates” adopted widely across developed economies as part of the response to the 2008 financial crisis. Among the consequences of the easy money policies in the U.S. and the European Union, which were accompanied by a stimulus in several emerging markets, was the sharp upsurge in liquidity and the resultant second-order effects on asset prices and inflation, and currencies and the terms of trade in the emerging economies. It is in this context that the Fed’s decision last year to embark on a policy normalisation was seen as central to a gradual and welcome restoration of global monetary normalcy. Ms. Yellen herself acknowledged that monetary authorities may need to consider adopting additional tools in dealing with recessions and economic shocks in future as average global economic growth and interest rates move into a lower orbit than in the past.
The Fed chair’s comments also highlighted some of the risks that lie ahead for the U.S. economy. In particular, she flagged the fact that business investment remains soft, and subdued global demand combined with the dollar’s recent gains continues to constrain the country’s exports. U.S. economic data, including figures for consumer confidence and payrolls, due later in the week may help bring more clarity on the likely timing of the next increase in the Fed funds rate — September, as a minority of economists predict, or December, as investors anticipate. With the Federal Open Market Committee set to make its next statement on September 21 after a two-day meeting, policymakers at the RBI will have about two weeks to factor in the interest rate stance in the U.S. while deciding on domestic borrowing costs. A rate hike by the Fed will have implications for the Indian currency and interest rates that the RBI must take cognisance of.
Read this opinion at : Preparing for the Fed rate hike
Source: The Hindu – Editorials