Fed Commentary

No rate hikes for the time being…

If there was one straight message from the Fed commentary, it was that there will be no rate hike in June 2015. If there was one hidden message from the commentary, it was that rates may not be hiked in 2015. What has led to this situation and what does it mean for global markets, especially India.

The US growth riddle…

US growth has been the biggest disappointment. A paltry growth of 0.2% in the first quarter is way below the growth achieved in the December quarter. Of course, generally the first quarter has been slow for the US. Additionally, this year the US had a problem of a very harsh winter. But experts are already beginning to ask whether this 0.2% in the first quarter is an exception? Or this is indicative of a deeper problem of huge debt and slow jobs growth in the US.

Inflation is not picking up…

The Fed had an inflation target of 2% to justify rate hikes, but actual inflation has been way below that. Of course, crude oil has been the biggest contributor to low inflation and that is showing signs of bottoming out. But will that spike inflation? Highly unlikely! With supply continuing to pour in and Iran likely to enter the global oil market, the oil glut could only take prices downwards. Secondly, all the major countries like the EU region, Japan and China are following an easy money policy, so higher inflation will take time to manifest. With Chinese demand for commodities ebbing, it is hard to imagine a steep rise in inflation. So a spurt in inflation is largely ruled out.

Exports and a strong dollar…

This is the biggest dilemma for the US Federal Reserve. Large US corporations are feeling the pinch of a strong dollar on their export earnings. Higher Fed rates will only make the dollar stronger. Neither the large US companies nor the US Fed will be comfortable with this scenario. This has probably been the strongest argument for keeping rates in the band of 0-0.25% since 2008.

Will Yellen bite the bullet?

That is a million dollar question. Past experience with rate hikes have not been too good. In 1994, when the US embarked on rate hikes, it created an unprecedented monetary tightness in the US as well as across the world. In 2006, when Ben Bernanke started rate hikes, it triggered off the sub-prime crisis which had long term consequences for the global economy.

As Janet Yellen ponders over a rate hike, these two events will weigh heavily on her mind. The US has managed to survive and thrive in a cheap money era. Will Yellen upset the applecart? It does not look likely, at least, in 2015. ©

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