US Federal rate hike of March 2017.

Taken from our blog,”Brinks of economic thoughts”

US Federal rate hike of March 2017.


FOMC meet of US Federal Reserve came with much anticipated outcome this week, the expected rate hike to a range of .75-1 %.This benchmark interest rate hike of .25 % has only been the third over the past decade. The major reasons which enabled Fed to take this step was consistent fall in inflation and decline in unemployment figures to less than 5 %{ 4.7 % to be exact}.
Federal reserve policymakers are expected to increase the interest rates 3 times this year.US economy, which is one of most diversified financially driven economies of the world has seen significant changes while showing the solid progress in growth parameters. It has given indication that further rate hikes will be gradual.
Interestingly US economy affects all political and economic aspects of world. In Indian context if we make an assessment, this had been widely forecasted that US will continue to make rate hikes, one among which was done just 3 months ago. The major challenges which it posed to nearly all emerging economies were of heavy capital outflows and lower inflows.

As of now major central banks like US, UK, and ECB,have got the aim to contain the inflation mark below 2 %.Federal reserve officials were also in a position to make rate hike as of low unemployment rates over past consistent 40 + weeks.
One of the observation which were made by Janet Yellen,Governor of Fed in March 2015 was, if Fed wanted to ignore the tight labour market, inflation rate will easily surpass its 2 % assumed target. Situation at that moment will be where Fed will be forced to raise the rates sharply to bring the inflation to control, putting up the possibility on another recession, so increasing the unemployment rates. She insisted in her arguments that it will be better to increase the rates in advance.

This has many impacts on giant economies of Asia too. Although this is also expected that next Fed rate hike may be as earlier as June-July. Donald trump who has been very protectionist for US interest seems to be insisting on passing his ambitious plan of tax cuts, increased spending on infrastructure and more deregulation in markets. It becomes a cycle when ones stringent regulation are most sought which follows advocates of more and more flexibility in rules.
Immediate impact on the export driven economies is bound to be positive. Rates going up are actually an indication on the sound basics of economy and indeed it means that better performing companies from Asia will be able to sell of better in USA.In terms of pure economics, with strengthening of Dollar, Asian exports will be becoming more cheaper-so enhancing the growth rate of primarily export driven economies like China, Japan, S Korea. But if we assess the pressing upon purchasing and use of “buy American” as emphasised by Trump, then these giants may be at the receiving end too.
Chinese economy which has been facing pressures due to slowing growth ,weakening currency and compiling debt.BIS figures indicate that overall debt accumulation by China’s government ,corporate and household sectors have been a massive 26 tn $,as it stood in 2015,which easily makes it more than 250 % of GDP.A growth model which was unparalleled like China is also trying to make phased transition to an economy which is market driven, which depends more on consumer spending, rather than pumping cheap exports globally.
This had been getting forecasted as early as 2015, that rates will be hiked by 1 % or so. Janet Yallen when appointed as Fed Governor had a tough challenge .Any major event of US economy creates impact globally .Historically the unemployment rate have been at low and Fed seems keen to raise rates than to the ones who worry about low inflation. Financial markets are also booming.
Asia has to be now ready for prepared for an era where cheap money boosted stocks. With all indications of more expected rate hikes coming up, Fed moves will be watched ahead.

{Attached is the link of FOMC meet}



Harsh Vardhan Pathak

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