Money & Banking

US Fed to go slow and steady on rate increase

Gurumurthy K BL Research Bureau | Updated on January 24, 2018


The Indian rupee which was threatening to fall since the beginning of this week got a breather today. Fed Chair, Janet Yellen's cautious stance on rate hikes, on Wednesday quelled some of the concerns. The US growth projection for 2015 is lowered to 1.8-2 per cent from 2.3-2.7 per cent projected in March and 2.6-3 per cent projected in December. However, Yellen in her press conference stated that recent economic developments warrants the beginning of the rate hike some time this year, but further increase in rates thereafter would be 'gradual'. She also made it clear that any rate hike plan will be well communicated to avoid any turmoil in the global financial markets as was seen in 2013 during the tapering of the quantitative easing programme.

What to watch?

While the recent housing sector data has given some relief to the Fed, there are three other lingering concerns--weak exports, employee wage growth and lower energy price. The US exports had tumbled about 6 per cent from $197.76 billion in October to $186.77 billion in February. The latest data release earlier this month shows that the exports are showing some signs of pick up. The US exports stands at $189.90 billion as of April, up 2 per cent since February. Consistent improvement in exports in the coming months can ease the Fed's concern.

Though the Fed is positive about the overall trend in the labour market, it is still worried about the subdued wage growth and slower pace of improvement in unemployment rate. The unemployment rate currently stands at 5.5 per cent and the Fed expects it to come down to 5.2 to 5.3 per cent this year. The Federal Reserve’s desired long run target is 5 to 5.2 per cent.

The sharp fall in the crude oil price last year has kept inflation much below the Fed’s target level of 2 per cent. The statement that the “energy price has stabilised” might indicate that the Fed does not anticipate further fall in the oil price. A sharp rally in the crude oil price could help in pushing the inflation higher towards the Fed target.

To sum up, the US exports, employee earnings growth and the crude oil price will need watching in the coming months. These indicators will give some cues on the beginning of the US rate hike.

Rupee recovers

The Indian rupee which was trading below 64 all through this week has strengthened today taking cues from the global weakness in the dollar. It is currently trading near 63.8. The key resistance level to watch now is 63.75; a strong break of which can see the rupee strengthening further and move towards 63.50 and 63.30 in the short-term . But the fear of foreign money outflows from the Indian market could keep the strength in rupee limited. The Foreign Portfolio Investors (FPIs) have turned net sellers of Indian debt for the first time last month after twelve months of consistent buying. The FPIs had sold $1.3 billion in the debt segment. They have also turned net sellers in the equity segment over the last two months. If the FPI sell-off intensifies in the coming months, then the rupee could come under pressure once again.

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Published on June 18, 2015
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