· U.S. Federal Reserve Chairman Jerome Powell’s speech last week at the conference for central bankers in Jackson Hole, Wyoming was a strong defence of the current gradual approach to raising interest rates.
· With the American economy growing at a strong pace, inflation being close to the Fed’s 2% target and unemployment at a 20-year low, President Donald Trump has been so sharply critical of this approach of raising interest rates that it has led to suggestions that he is encroaching on the Fed’s independence.
· Mr. Trump is worried that rising interest rates could derail the country’s economic growth, check the stock market boom, and thereby affect his own popularity and electoral chances.
· Coming from another perspective, some are concerned that the Fed may in fact be raising interest rates too slowly, despite strong signals of an overheating economy.
· In his defence, Mr. Powell emphasised the imprecise nature of economic variables such as unemployment and inflation in the modern economy in drawing attention to the risks of raising rates either too fast or too slow.
· Apart from the assurance that interest rate hikes will be gradual as before, the Fed Chairman had a message that has implications for the monetary policy stance of central banks in emerging market countries.
· He hinted that “risk factors abroad” could lead to a change in the Fed’s policy stance in the future.
· The Fed’s tightening policy stance has rattled several emerging markets, most notably Turkey and Brazil, which have seen their currencies tank under selling pressure.
· The Reserve Bank of India, too, has had to raise rates twice in the last few months, in part to defend the rupee.
· The stock market rallied in response to Mr. Powell’s statement, and the U.S. dollar, which has strengthened this year, witnessed a fall.
· It is well-known that the U.S. central bank has historically been non-committal when it comes to framing policy with the concerns of emerging markets in mind.
· A shift in policy under Mr. Powell would mark a significant change in the Fed’s outlook towards the rest of the world.
Source : The Hindu