Powell testimony gives temporary relief to Indian markets
In the US, the FED follows a typical data path. First, the FOMC meet makes the rate announcement and discloses liquidity path. Secondly, the publication of the minutes follow after 21 days. After around one week, the FED chairperson testifies before the US House of Representatives, Financial Services Committee. Here, the FED chair now only updates on the subsequent developments but also fields question.
What did Powell say in his testimony?
In his testimony to the House, Powell did admit that it was necessary to ensure that the rate hardening and liquidity adjustment was not disturbed. However, he also clarified that the Ukraine war had introduced new risks to the straightforward implementation of Fed policy. Here are some takeaways.
1) The impact of the war between Russia and Ukraine on the trajectory of the US macros would be limited. However, Powell admitted that at this point of time, the full import of the impact of Ukraine was not fully visible and remained a major X-factor.
2) One evidence of the shift in the Fed approach was evident from the fact that Powell has downsized the rate hike expectations in the 16th March FOMC meet from 50 bps to 25 bps, although he did underline that rate hike decision was the right one.
3) With inflation nearly 5-5.5% above the target of 2%, Powell said that there was the need to start the rate hardening process immediately. However, Powell also hinted at the importance of staying nimble and fleet footed with respect to monetary responses.
4) An important takeaway from the Powell testimony was that there is, at least, an admission of a fourth dimension to the rate decision. Formerly, it was just inflation, employment and GDP growth. Now Ukraine and oil are the fourth dimension.
5) The situation in the Caucuses and the risks to Europe as a whole, opened up 2 options for the Fed. Firstly, the spike in oil and minerals could push inflation making rate hike inevitable. On the other hand, the Ukraine crisis could throttle growth.
6) Finally, there is again a dilemma for the Fed on the balance sheet front. For instance, Powell has already committed to downsize the balance sheet, starting March. Now, the emerging scenario in Ukraine could call up on the Fed to bring about dollar stability. This could expand the balance sheet and again be at cross purposes with Fed intent.
To cut a long story short, Powell has given adequate hints about the tightrope walk for the Fed. The demands of the war like situation in the Ukraine may have effects that could demand exactly the opposite of what the Fed is
Why this is good news for India
In a way, India should be pleased about the outcome of the Powell testimony. Here is why. To begin with, India will be happy with a stance that is not too hawkish, even if it is not too dovish to begin with. This gels with the broad intent of the RBI approach. Secondly, the Powell testimony also indicate that India need not worry too much about the yield gap between India and the US narrowing to the extent that risk-off flows could intensify.
Thirdly, the FED has also indicated that if it has to defend the dollar amidst volatility, it would be less aggressive about its bond unwinding targets. The Powell testimony does not really change the macroeconomic scenario for India beyond a point. However, it does underline the important role that the Ukraine war could play in the future trajectory of global monetary policy. Dovishness, even if it is forced, should be beneficial to India.
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