US Fed and Greece

Two risks that could eventually peter out…

If there are two risks that can spook the global markets, it would have to be the US Fed and Greece. In her latest public announcement, Janet Yellen has underlined that the labor market and US inflation still need to go higher before rate hikes can be considered. As and when the rates are hiked, the impact will be felt across the globe. This is especially true for countries in emerging markets which are dependent on capital inflows! Greece is a slightly different ball game. The entire EU is keen to retain Greece in the Euro zone and hence Greece can act pricey. But reality will dawn on them, sooner rather than later.

US Fed – Winds of change…

The US Fed has been grappling with the issue of rate hikes for the past couple of years. The experience of April 2013 would serve to remind the Fed that any sudden dose of rate hikes could cause tremors globally. They would want to avoid that. Also, rate hikes will make the US Dollar stronger; a situation that has not gone down well with US companies with global operations. A rate hike, as and when it happens, will be the first hike since 2006. There will always be that lurking fear that rate hikes could recreate a new version of sub-prime.

On the other hand, there is also the reputation of the Federal Reserve at stake. One of the key factors has been the ability of the Fed to surprise markets and go against popular market wisdom. Yellen would keen to ensure that the independence of Fed decisions from financial market implications is maintained. There may be a middle path. Most likely, a rate hike will be announced later this year, although the quantum and tone may be more dovish than originally announced.

Greece is still a riddle…

It is hard to say what will happen to Greece and consequently the Euro. Even as Alexis Tsipras continues to harp on his anti-austerity chord, he is realizing that he is left with few friends. European nations poorer than Greece have also gone through this austerity. They will not let Greece get away so easily. The lender nations, principally Germany, are aware that a Greek pardon will have negative political reverberations in their home countries. And Russia which was threatening to support Greece, will not want to rub Germany the wrong way. That is something Putin has also made clear.

Frankly, Greece may not be left with too many options. It may have to go through the austerity to remain solvent and pay its bills. Tsipras realizes that bravado has its limits.

At the end of the day, the US Fed will hike rates and Greece will restructure. But those who expect market tremors may be disappointed. At best, the impact may be a mild tremor. ©

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