hawks are winning

A three-quarters percent increase in its target fed funds rate was widely expected by the US Federal Reserve. Financial markets were curious to know how close the rate had come to its peak in this bout of the Fed’s fight against inflation. The response worried market participants, as Fed Chairman Jerome Powell suggested it would be “premature” to halt monetary tightening. Interest rates, he said, would eventually be “higher than previously expected”. There was a stir in the stock markets. The Bank of England also soon raised its rate, its biggest increase in 30 years. As of now, price stability has been a bigger concern for these central banks than a possible slowdown due to policy pressure. In India too, our general price level has been above the official target upper limit for several months, although it is not as dramatic a breach as in the West. This may explain why the Reserve Bank of India’s cumulative rate hike of 190 basis points since May has not kept pace with the Fed’s three percentage point upward move. However, a wide gap could draw capital out of India. And it is unsafe to rely on the Fed’s resolve before price stability is achieved.

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