Right said Fed, Can inflation be peaking? – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/right-said-fed-can-inflation-be-peaking/articleshow/93195407.cms

Synopsis

The Fed, however, is not done yet, and the interest rate differential between the US and India will keep narrowing if the two central banks stay on their respective courses.

The US Federal Reserve‘s latest 0.75-percentage-point hike in interest rate this week has calmed markets. The latter are reading in this action that big moves to tame inflation are now behind the US central bank after its fastest gear shift in four decades. Fed chair Jerome Powell did not indicate the size of the central bank’s next rate action in September. But he did acknowledge the US economy was slowing down and he wanted to see a sustained slack in demand. The Fed’s hawkishness will be guided by how inflation – running at 9.1% and more than three times the target 2% – reacts to the movement of the central bank’s overnight interest rates from near zero to the range of 2.25-2.50% through successive hikes since March 2022. Powell does not expect the Fed’s quantitative tightening will tip the economy into recession because the jobs market in the US is far too strong.

US treasury yields and the dollar index fell on Powell’s comments. This has eased some pressure on the rupee and Indian gilt yields as capital outflow is determined by the speed of US interest rate increases. The Reserve Bank of India (RBI), which will announce its rate action in the first week of August, is unlikely to be unduly influenced by the temporary easing of capital market volatility. The Indian central bank is dealing with a different inflation dynamic, which may be cooling off from a peak in May earlier this year. Its interest rate trajectory has been lower, and this could continue in a pursuit of minimising the growth sacrifice. RBI‘s policy rate has still not reclaimed the level it was at before quantitative easing began.

The Fed, however, is not done yet, and the interest rate differential between the US and India will keep narrowing if the two central banks stay on their respective courses. Capital movement is unlikely to reverse in the near term and the rupee will remain under pressure. India’s trade deficit and inflation are dependent on the pace at which the US economy is cooling.

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