FED Rate Hike- India Impact

FED Rate Hike- India Impact.

FED will be meeting on 15th Dec 2015 and to decide if they will end their Zero interest rates and begin the rate hike cycle. As per our analysis of FED Chairman Janet Yellen’s testimony on 2nd Dec 2015 we do not see that she will hike rates and here is why.

Parts of verbatim have been reproduced here.

“over the entire expansion has been sufficient to help move the labor market closer to the FOMC’s goal of maximum employment. However, less progress has been made on the second leg of our dual mandate–price stability–as inflation continues to run below the FOMC’s longer-run objective of 2 percent”

Dual means consisting of two parts, elements, or aspects. So the first part of her objective or mandate was to being back maximum employment by lowering unemployment which has been achieved. However we can clearly see that the second part of her objective is to avoid deflation and see Inflation around 2 percent. Inflation is as of now between 1.2-1.5 percent so it is well below the comfort zone of the FED. If it is in below the comfort zoner of the FED how will she raise rates? If she does raise rates means inflation which she wants it to be around 2 percent will fall further below 1 percent and going by her own statements it will be detrimental to US economy if she does raise rates, further she will also have some serious answering to do before some commitees if she takes action contrary to what she is saying or stipulating in her own testimony.

higher foreign exchange value of the dollar, as well as weak growth in some foreign economies, has restrained the demand for U.S. exports over the past year

She is already admitting that higher value of the US dollar vs other curriencies is dapaming growth in the USA. If she raises rates means dollar further will gain value / strength and put further pressure on USA exports, so why will she add to already existing problems for the export community of USA?

In addition, lower crude oil prices have reduced activity in the domestic oil sector. it is often helpful to look at inflation excluding those two categories–known as core inflation–which is typically a better indicator of future overall inflation than recent readings of headline inflation. But core inflation–which ran at 1-1/4 percent over the 12 months ending in October–is also well below our 2 percent objective, partly reflecting the appreciation of the U.S. dollar. The stronger dollar has pushed down the prices of imported goods, placing temporary downward pressure on core inflation

Again she mentions core inflation is running lower than FED’s comfort level and she says it is partly due to lower crude oil prices, crude oil prices have moved lower due to reduced demand and higher value of the US dollar. So if she does raise rates means stronger dollar >> further lower crude oil prices >> further lower core inflation means they again run the risk of a deflation. Will they expertiment with it ? Not at all.

Hence we can conclusively say that based on her statements made on 2nd Dec 2015 we do not see a rate hike by FED on 15th Dec 2015.

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