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S. Balakrishnan

Bond yields have risen significantly not only in the US,, but also in Europe and Japan.

THE United States' GDP for the third quarter was out last Thursday. The economy was going gangbusters. Growth was 7.2 per cent (annualised) and far above the consensus forecast of a little over 6 per cent.

Durable goods and capital spending was up. Housing retained its sheen and the trade deficit was not as big a drag as expected. All this despite an inventory drawdown which subtracts from GDP.

The outlook on the job front is improving — so much so that the Federal Reserve in its post-meeting statement last week said that the labour market was stabilising, in contrast to its negative view in earlier meetings. Initial jobless claims (reported weekly) have successively fallen below the watershed mark of 4,00,000 and last month's non-farm payroll showed an accretion to jobs.

Other data continue to be extremely strong. The ISM index, a widely followed barometer of manufacturing sentiment, pushed upwards and construction spending came in above forecasts.

Projections of GDP growth in the last quarter are in the vicinity of 4 per cent, but, on current trends, could be closer to 5 per cent.

The Fed has made no secret of its conviction that it is deflation, and not inflation, which poses a danger and this can be tackled only by cutting interest rates to low levels and sticking to them for a long period of time. It has followed this prescription to the letter.

If the proof of the pudding is in the eating, the recent performance of the US economy has vindicated the Fed — indeed made it emerge as a shining star for the global economy, which, once again, is hauling itself out of recession and slow growth thanks to Yankee largesse. Peering into the future, what does all this signify for rates? The Fed's oft-repeated assurance of "an accommodative monetary policy for a considerable period of time" is not washing with the market. Bond yields have risen significantly not only in the US — 10 year Treasurys are up from just over 3 per cent in July to nearly 4.4 per cent now — but also in Europe and Japan, although the former's growth prospects are still a question mark and the ghost of deflation has not left the latter. There are incipient signs of pricing power returning in some small measure to business in the US. That suggests deflation fears are overblown.

Given the robust data and outlook and rising stock markets all over the world, a Fed tightening is likely to come sooner rather than later.

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