Countries such as India that will feel the pressure of higher US interest rates need to pencil in the possibility of more rate hikes than the markets are now assuming
The minutes of the latest meeting of the panel that sets US interest rates seem to suggest that the Federal Reserve is on course to increase rates thrice this year. Is that enough?
The US economy is now on a roll. It is also close to full employment. The Donald Trump administration has torn up the macro policy handbook by announcing a massive fiscal expansion in these circumstances. The US federal funds rate is now at 1.5%. Three more hikes will take it to 2.25%. That will still be 125 basis points below the level before the 2008 financial crisis. Countries such as India that will feel the pressure of higher US interest rates need to pencil in the possibility of more rate hikes than the markets are now assuming.
What makes the current assumption believable is that inflation continues to be under control in the US, while inflation expectations are anchored. But that can change quickly once the full force of higher US fiscal spending hits the economy.
The upshot: Do not ignore the risk of steeper US rate hikes over the next few years.
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