PremiumThe details from the US Federal Reserve’s policy statement late on Wednesday showed that the Fed is poised to fast-forward its rate hikes one year ahead to 2023. Chairman Jerome Powell indicated that the US economy’s performance has been stronger than expected and will help the central bank to taper off its ultra-loose monetary policy early.
“You can think of this meeting as the talking-about-talking-about meeting, if you like," Powell said in a press conference. In other words, the Fed is thinking about tightening its asset purchases, if not talking. The Fed’s dot plot predicts two policy rate hikes in 2023. The surprisingly hawkish tone drove US treasury yields and the dollar up. The impact was also seen in most Asian currencies including the Indian rupee today as they weakened.
Fed’s statement comes after US retail inflation showed a sharp increase in May to 5%, a 13-year high. Inflation has been on an upswing across geographies and a surge in prices of most commodities reflects the price pressures. In essence, central banks from both advanced and emerging economies face a common troubling event - inflation. However, the response from central banks of different economies may differ given the impact of the pandemic on growth.
Back home, analysts expect the Reserve Bank of India (RBI) to begin tightening its monetary policy as early as the fourth quarter of FY22. “Given our view that the growth impact of the second wave will be less than the RBI’s projection and our view of elevated inflationary pressures, we expect the theme of policy normalization to begin in Q4. We expect a reverse repo rate hike in Q4, and a total of 75bp in repo rate hikes in 2022," wrote analysts from Nomura in a 15 June note.
Indeed, the latest spike in retail inflation for India is uncomfortable for policymakers. Consumer price index (CPI) inflation rose to 6.3% and economists believe that average inflation for FY22 could be higher than the 5.1% projected by the RBI. Ergo, the pressure on the central bank to respond to inflationary outcomes is increasing. Moreover, the impact of the second wave has been less debilitating on economic output than the first one in 2020. While high frequency data show moderation across economic measures, mobility restrictions have begun to be lifted gradually and a pick-up activity is manifesting.
However, indications from the RBI have been on the contrary so far. In the latest monthly bulletin, the central bank has said that market-based inflation expectations are on the decline. The stance of the central bank seems unchanged, which is to be focused on growth.
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