- Federal Reserve has raised interest rates by 0.75
- Fed is dedicated to bringing inflation back to 2%
- Fed action may also have an impact on RBI’s approach in maintaining money supply in the economy and managing inflation
- Globally markets are tumbling due to tightening monetary policy and unstable geo-political conditions
On June 15, 2022, the Federal Reserve raised interest rates by 0.75 percentage point, the third increase this year and the biggest since 1994. The measure is intended to combat the fastest rate of inflation in more than 40 years.
According to the FOMC statement, the Fed is dedicated to bringing inflation back to 2% and will take all necessary steps to attain full employment and keep inflation within the target range in the long run.
The Federal Reserve has agreed to boost the federal funds rate to 1.5 to 1.75 percent in order to fulfil its goals. Furthermore, to shrink the size of the Federal Reserve’s balance sheet, the Fed will continue to reduce its holdings of Treasury securities, agency debt, and agency mortgage-backed securities.
Consumer prices report released in US on June 10 prompted the Fed to take a harsh economic measure. According to the report inflation is rising Over the last 12 months ending May 2022. Report highlighted that all items index increased 8.6 percent, energy index rose 34.6 percent over the last year. Increase in energy index is the largest 12-month increase since 2005. Similarly, Food index also increased by 10.1 percent. Increase in the food index is the the first increase of 10 percent or more since March 1981.
The Fed was prompted to adopt a tough economic measure after Consumer prices report was released on June 10. Inflation has been climbing over the last 12 months, according to the study, which ends in May 2022. Over the last year, all items index jumped by 8.6%, while the energy index increased by 34.6 percent, according to the report. The increase in the energy index is the biggest in a year since 2005. Similarly, the Food Index grew by 10.1 percent. The increase in the food index is the first increase of 10% or more since March 1981.
Fears are growing that the Higher rates will squeeze liquidity and may further push the economy towards recession. Fed action may also have an impact on RBI’s approach in maintaining money supply in the economy and managing inflation. Their may be possibility that RBI may also be increasing interest rates for keeping the prices under control.
Addressing the Modern BFSI Summit hosted by Financial Express. The Reserve Bank of India’s Governor, Shri Shaktikanta Das, stated that in March, the RBI determined that economic activity was above pre-pandemic levels and decided to transfer its focus to inflation control.
Governor said that tolerance of high inflation was a necessity, RBI stand by its decision. Governor Das stated that the 4.5 percent inflation projection for FY23 in February 2022 was based on the premise that crude would be at USD 80 per barrel. However, the Russian invasion of Ukraine has transformed the situation.
Globally markets are tumbling due to tightening monetary policy and unstable geo-political conditions. It may be possible that Fed’s actions may have a bearing on RBI’s decision for controlling inflation. Also India would be heading for election in 2024. In such a situation it becomes imperative that prices of goods are kept under check and will be priority for the Modi Government.
Galactik Views