Jerome H. Powell (chair of the US Federal Reserve) indicated on Thursday that the central banking institution was ready to increase interest rates quickly starting in May. This is to try to cool down the economy and to prevent rapid inflation from becoming a permanent feature. For More Updates Stay Tuned With Moneycompanion.us.
Powell stated that a larger than usual increase of half a point “will be on the table for the May Meeting,” after explaining that in a time of high inflation, “it is appropriate, according to my view, to move a little faster” to raise borrowing cost to try to cool down demand.
Powell’s comments at the International Monetary Fund discussion on the global economy are likely to confirm investor expectations for an important interest rate hike at the central bank meeting on May 3-4.
Global markets slowed down Friday after traders increased their bets on interest rate hikes in response to Powell’s hawkish remarks. The Dow Jones Industrial Average in the US was down 2.12 percent, while the S&P 500 was 1.96% lower and the Nasdaq Composite dropped 2.19 percent. This was the end of a turbulent week that saw bond yields rise due to expectations of higher interest rates. Friday’s drop in the Sensex was 715 points.
The currency markets are down 1.36 points to $1.36, and the rupee is down 25 paise due to stronger outflows in anticipation of a US rate hike.
On Thursday, Powell spoke at a difficult time for the US economy and global economics. Despite the fact that growth has been strong since the beginning of the pandemic but with stubbornly high inflation in the US and other countries, this has not meant that the economy has seen a significant recovery.
Prices are rising at an unprecedented rate. Russia’s war against Ukraine is causing the situation to worsen by disrupting supply chains and driving up gas prices. The conflict in Ukraine is expected to cause recessions in many Eastern European countries this year, and it is threatening the wider global economic outlook.
The risks to growth have been monitored by US policymakers, but they are more concerned about the impact of the war on inflation from an economic perspective. The March Consumer Price Index by America showed prices rose 8.5 percent over a year ago, which is the highest rate since 1981. This was due to rising oil prices and increased rents, making it more difficult for many goods and services to become more expensive.
Powell and his colleagues have been disturbed by the persistence and breadth of US inflation. They had hoped that rapid price rises would slow down as the economy returns to normal. However, the Fed raised interest rates in March to try to prevent high inflation from becoming more permanent.
Stock Impact On India
The US Federal Reserve’s hawkish comments had a reverberation on Friday in stock and forex markets. On Friday, the benchmark Sensex fell almost 715 points while the rupee declined 25 paise to close at 76.42 per dollar.
The bond markets responded by raising yields on benchmark 10-year paper by three basis points to 7.17 percent.
According to market circles, the closing was influenced by continued selling by foreign portfolio investors.
The Fed’s comments came at a time when corporate results are not rosy, and firms have seen their margins being hit by rising input costs.
The heat also hit the forex market. Anindya Banerjee, VP of currency derivatives at Kotak Securities Ltd., stated that the rupee closed 25 percent higher at 76.42. This was due to dollar demand from large corporations and speculative purchasing on account of weak stocks.
“Overnight, hawkish comments by the US central bank chief have increased chances of a 75 basis point rate hike at upcoming FOMC meetings. This is why the dollar has been traded all day. He said that a strong dollar index and weak Chinese Yuan are adding to the downward pressure on rupees.