Over to the Fed

Will the Fed indicate significant tightening of monetary policy in 2017? Will a tighter monetary policy work in tandem with a much looser fiscal policy under Donald Trump?


Photo: Bloomberg
Photo: Bloomberg

The US Federal Reserve will take an important decision on interest rates this week. The futures markets are already pricing in an increase of 25 basis points. The minutes of the November meeting of the Federal Open Market Committee, which votes on interest rates, shows that the case for a rate hike is strengthening among monetary policymakers. The dollar has rallied.

This week could see just the second rate hike by the Fed in almost a decade. Interest rates in the world’s largest economy continue to be very low. The rest of the world needs to watch out for two things. First, will the Fed indicate significant tightening of monetary policy in 2017? Second, will this tighter monetary policy work in tandem with a much looser fiscal policy as the hallmark of the economics of Donald Trump? The signals will matter more than the actual policy decision.

The Indian monetary policy committee’s call to hold rates last week was eminently sensible when seen against this uncertain global backdrop.

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