US Fed Rate Hike: The US Federal Reserve raised interest rates for the first time since 2018 on March 16, 2022 by 25 basis points. The Fed Reserve laid out an aggressive framework to push borrowing costs to restrictive levels next year to control the worst inflation in four decades amid the COVID-19 pandemic and Ukraine crisis.
The Federal Reserve has decided to hike rates to raise borrowing costs enough to slow growth and bring down the high inflation. The bank has projected that its policy rate will be between 1.75 percent and 2 percent by the end of 2022. The rate is expected to climb higher to about 2.8 percent next year.
The US Federal Reserve had kept the interest rate almost near zero since the beginning of the Covid-19 outbreak in 2020 to support growth.
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Retail Inflation in US
The retail inflation in the United States was recorded at 7.9 percent in the United States in February 2022, which is the highest in 40 years since 1982. While the deadly COVID-19 waves disrupted global supply chains and led to an increase in prices of essential commodities, the recent Russian Invasion of
Ukraine has created additional pressure on the rising inflation with prices of global commodities continuing to remain elevated. The Ukraine War has majorly impacted the crude oil prices, pushing them to as high as $140 per barrel, which is the highest in 14 years.
As per the Fed Reserve, current measures will be enough to curb the record-high inflation. The Federal Reserve Chairperson Jerome Powell stated that the high inflation is expected to come down by the second half of the year and fall to its target level of 2 percent by 2024. He also expressed confidence that a strong US economy will be able to expand even with a less accommodative monetary policy.
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US Fed Rate Impact on Indian Market
The hike in interest rates in the United States will have an impact on the equity markets and debt across the world. The stock prices have already gone up after the announcement, while S&P 500 surged to close 2.2 percent higher, NASDAQ also jumped to close 3.7 percent higher and Dow Jones also saw a jump.
India's domestic market indexes Sensex and Nifty also jumped higher on March 17. While Sensex jumped 1,000 points, Nifty crossed 17,200.
US Fed Rate Hike Impact on RBI Policy
The Reserve Bank of India in its bi-monthly Monetary Policy Committee meeting in February 2022 had decided to continue its accommodative stance and kept the repo rate unchanged at 4 percent and reverse repo rate unchanged at 3.35 percent. The CPI inflation projection was retained at 5.3 percent for FY 2021-22 and 4.5 percent for FY 2022-23.
The RBI had stated in February that consumer price inflation has risen higher and while there has been cushioning in food prices, core inflation remained high and there was a renewed increase in international crude oil prices.
However, there has been stablisation of crude prices, at least in the Asian markets amid Russia's war in Ukraine. The Indian market is expected to stay positive going forward as well, especially with encouraging signs of the Russia-Ukraine conflict reaching a resolution phase.
This may lead RBI to reassess its accommodative stance in the next month’s policy meeting, which is scheduled between April 6-8. Some economists also feel that RBI may have to revise its inflation forecast upward with inflationary pressures becoming generalised.
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