Shifting Focus now to the United States, what happens there now , also could have an impact on the entire world. The US federal reserve has announced another interest hike . analysts were split between 75 and 100 basis points , but in the end the FED went with the former 75 business points and with this hike, a couple of things are clear number one ,this cycle of monetary tightening is not ending soon. what does that mean it ,basically means there could be similar hikes in the future.
The fare is not interested in half measures it wants completely victory over the rising prices. listen to this,”my colleagues and I are strongly committed to Bringing inflation back down to our two percent goal. we have both the tools we need, and there solve that it will take to restore price stability , on behalf of American families and businesses.” price stability is the responsibility of the Federal Reserve and serves as the Bedrock of our economy. number two what will the impact be of this rate hike. before answering that ,let me give you some context, this was the third consecutive 75 basis point hike by the Federal Reserve.
Simply put loans are now more expensive. now just to be clear here , that is precisely the idea behind raising interest rates, less borrowing means less spending and less spending equals lower inflation. that is how the economic theory works but there is a downside to this strategy. if the rate hikes are too steep, it could trigger a Slowdown. There will be job Cuts, unemployment and finally a full-blown recession. many economists fear this will happen either by the end of this year or early next year . whether it happens or not depends on what the FED is thinking and right now , they have hinted at more hikes.
They want to increase the lending rate to 4.4 percent by the end of this year and to 4.6 by 2023.if that happens, all bets are off listen to what the FED chairman had to say about the looming recession” we don’t know, no one knows whether this process will lead to a recession or if so how significant that recession would be”,inspiring is it in fact most central banks around the world are following the same strategy. they are hiking interest to control inflation . the bank of England announced a 50 basis point hike today , the Swiss National Bank 75 basis points , it is their largest ever interest hike. Switzerland’s Benchmark rates were minus0.25 percent ,now standing at 0.5 percent, Norway Central Bank raised the key rates by 50 basis points, it is at the highest level since 2011.Vietnam increased interest rates by 100basis points , Indonesia by 50 basis points. so most Central Bankers are thinking along the same lines . They are willing to risk a recession to battle inflation .how exactly are the markets reacting to this move.
Well the fed’s decision was not exactly surprising , so the markets had already factored in the rate hike. yet most of them closed in the red let me give you a quick round up. Dow Jones closed 1.7 down, Britain’s foot seat closed 0.3 percent down, and the German tax one percent the Asian markets also lost some of the gains . India sensex closed 0.57 down ,Japan’s Nikki 0.58percent, and the Hang sank 1.6 percent. so all in all a bad day for Global markets . the question is could it get worse when there is fear of recession. investors are wary of volatile assets things like stocks and crypto currencies.
So they abandon these forms of Investments and instead they prefer safer options like government bonds, and if that happens there could be an exodus of capital from the markets. especially Emerging Markets and this Is a major worry for India as well. The Reserve Bank of India’s next policy announcement is due this month itself. most experts agree there will be a hike. the question is by how much they are split between 35 basis points and 50 basis points . Morgan Stanley believing the RBI will go with 50 basis points, if so it could hamper India’s growth like all countries. India also has two considerations a tackling inflation and B securing growth .
In the last quarter India’s GDP grew at13.5 percent, it was higher than most major economies. at the same time it was lower than the rbi’s prediction. What does that mean,there are already indications of a Slowdown and if the RBI keeps hiking the interest rates. there could be a recessionat the same time . they cannot ignore inflation, it is the rbi’s legal duty to maintain price stability . if the inflation Target is breached for nine months . the RPI must explain itself to the government and on that front things are not looking good. consumer prices dropped in July, but they Rose to seven percent in the month of August . so now may not be the time to let off.
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