Us fed hikes rates why india must be mindful

Us fed hikes rates why india must be mindful

Recent data indicates that the sharp slowdown in the advanced economies is already beginning to impact India’s export and industrial performance. Policymakers in India must be aware of the risks to growth and macroeconomic stability as they attempt to steer the economy through this uncertain period.

On Wednesday, in its last meeting of the calendar year, the US Federal Reserve raised interest rates by 50 basis points. The federal funds rate now stands at 4.25 to 4.5 per cent. The projections accompanying the policy statement point towards a strong possibility of another 75 basis points of interest rate hikes over the course of the next year as the central bank continues its fight against inflation. This would take the federal funds rate to 5.1 per cent, up from the earlier expectations of 4.6 per cent. While the quantum of the rate hike in the December meeting was lower — the previous four consecutive rate hikes were of 75 basis points — the tone of the policy remained hawkish as the central bank sought to dismiss any doubt over the trajectory of monetary policy. “The historical record cautions strongly against prematurely loosening policy. We will stay the course, until the job is done,” noted Fed chairman Jerome Powell.

Data released a day prior shows that inflation has in fact moderated, though it continues to remain well above the central bank’s target of 2 per cent. In November, consumer prices rose at the slowest pace in the last 12 months. Core CPI, which excludes the volatile food and fuel components, rose 6 per cent in November, easing from 6.3 per cent in October. The sequential month-on-month momentum also suggests a softening of price pressures in the economy. As per the projections accompanying the policy statement, inflation (as measured by the price index for personal consumption expenditures) is expected to fall from 5.6 per cent in 2022 to 3.1 per cent in 2023. However, the projections on economic growth and unemployment underline the pain that the economy is likely to go through during this period. The economy is now expected to grow only at 0.5 per cent next year, down from the earlier assessment of 1.2 per cent, while the unemployment rate has now been pegged higher at 4.6 per cent in 2023 and is likely to remain around that level for some time. In his statement, Powell acknowledged the pain, noting that “reducing inflation is likely to require a sustained period of below-trend growth and some softening of labour market conditions.”

The revised projections also suggest that the central bank is, as of now, unlikely to cut interest rates any time soon. Rates are only expected to start falling in 2024. In fact, in his comments after the statement, Powell is reported to have said that it is too soon to talk about cutting rates. India will not be unaffected by tighter global financial conditions and slower growth in advanced economies such as the US. In fact, recent data indicates that the sharp slowdown in the advanced economies is already beginning to impact India’s export and industrial performance. Policymakers in India must thus be mindful of the risks to growth and macroeconomic stability as they attempt to steer the economy through this uncertain period.