Markets have been put on notice by Fed, which has signalled that easy money policy has run its course
Global financial markets had been awaiting a signal from the US Federal Reserve for long now and the Federal Open Markets Committee (FOMC) did not disappoint. The Fed maintained status quo on policy rate and assured that it will continue its bond purchases but it was the statement by Chairman Jerome Powell that discussions will commence soon on tapering bond purchases that was the highlight of the latest FOMC meeting. The statement is seen as preparing the markets for the imminent taper of bond purchases that now amount to $120 billion a month. The Fed revised median real GDP projections for 2021 upwards to 7 per cent while PCE (personal consumption expenditure) inflation for this calendar, at 3.4 per cent, is 100 basis points higher than what was projected in March. Given the robust growth led by household spending, strong demand in housing and a steady improvement in business investment, it is not surprising that the median projections for the Fed funds rate now indicate at least a 50 basis points rise in policy rates in 2023.
The Fed’s stance towards inflation will also be under close scrutiny in the days to come. Despite PCE inflation featuring well above its target rate of 2 per cent, the central bank continues to maintain that the spike is transitory, holding that supply bottlenecks in some sectors which are unable to meet the surging demand, has led to the increase in inflation. It is to be seen whether the Fed is right in assuming that shortages could ease with increase in labour force participation and higher production. Indian policymakers may be hoping that the Fed’s prognosis on inflation proves right and international commodity prices cool down after a few months as supply increases. But, if global demand continues to outpace supply, both the Fed and the RBI may have no choice but to take appropriate monetary action to address inflation.