Why in news?
The US central bank recently raised the benchmark interest rate for the third and final time this year.
What are the highlights?
- The Fed’s policy-setting Federal Open Market Committee increased the key lending rate.
- It made a quarter point increase on the cost of loans for everything from houses to cars.
- The federal funds rate is now in a range of 1.25-1.50%.
- Continued strong labour market and solid economy are cited as reasons for the hike.
- The Federal Reserve has however left its rate outlook for the coming years unchanged, with a forecast of three rate increases in the following year.
- This is despite the policymakers projecting a short-term acceleration in U.S. economic growth.
- The central bank thus largely continues with its gradual tightening of monetary policy.
- However, inflation is expected to remain below the Fed’s target of 2% for another year.
- Logically this remains a considerable concern, as policymakers saw no reason to accelerate the expected pace of rate increases.
Why should India care?
- There was a surprise depreciation of the US dollar and it weakened a little against the euro.
- The impact of these decisions on India and other emerging markets will depend on several factors.
- World assets are doing well as evident from stock markets in the US, eurozone, and Japan being at multi-year highs.
- The rate hike could lead to money flowing back into hard-currency assets.
- The actual announcement lifted gold prices quite unexpectedly.
- Demand for the precious metal from important consumers, China and India, is likely to be subdued in the months ahead.
- If global liquidity is cut by rate hikes, traders will sell Emerging Market assets first.
- An emerging market fund is a fund that invests the majority of its assets in securities from countries classified as emerging.
- These countries including India are in an emerging growth phase and offer high potential return with higher risks than developed market countries.
Source: Business Standard
