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All eyes were on the Jackson Hole Economic Symposium held last week, with many waiting to hear Federal Reserve chair Jerome Powell voice his thoughts on the economic outlook. Here are the key takeaways from Powell’s address.

What did Powell say at the symposium?

Powell, in his address during the symposium, stated that the central bank would start slowing down its monthly bond purchases or begin ‘tapering’ towards the end of 2021. However, it would be in no hurry to raise the Fed’s benchmark short-term rates thereafter, Powell said. Inflation levels, in his words, had met its test of “substantial further progress" and a “clear progress" had been witnessed in terms of maximum employment and an improving labour market. With the US economy evolving broadly as anticipated, it could be time to start reducing asset purchases towards the end of the year.

Why is the symposium so important?

The symposium is hosted in the Jackson Hole valley in Wyoming by the Federal Reserve Bank of Kansas City to discuss long-term policy issues. Its participants include prominent central bankers, US government representatives, policymakers, economists, financial market participants, and academi-cians. The conference sets the agenda for monetary and other macroeconomic policy changes. In the 2008 and 2009 conferences, the agenda was financial stability, while 2021’s conference theme is ‘Macroeconomic Policy in an Uneven Economy’. Powell’s address was keenly watched for the word ‘taper’.

Why did the symposium attract India’s interest?

Foreign institutional investments (FIIs) in Indian equities in the recent past have seen an outflow. In July, FIIs were net sellers of Indian equities worth $1.7 billion. The rupee strengthened on speculation that there would be no immediate tapering announcement resulting in raising of US interest rates. Investors have thus been keenly watching for ‘taper’ announcement.

What does tapering mean?

Under the unconventional monetary policy of quantitative easing (QE), which means buying bonds to lower interest rates and increase money supply in the economy, taper is the initial step in winding down or reversal of the QE. It may involve slowing of asset purchases and policies that withdraw from an executed monetary stimulus programme and help modify central bank activities. Since March 2020, the Fed has been purchasing $80 billion US treasuries and $40 billion mortgage-backed securities on a monthly basis.

How can ‘tapering’ impact India?

With the US reversing its QE plan and working towards a tapering of asset purchases and raising bench-mark short-term rates, US financial markets would be a more attractive option for investors, resulting in outflow of foreign investments from emerging economies such as India. It could lead to fluctuations in Indian capital markets and have an adverse impact on currency exchange rates. But the RBI has said India is better prepared than 2013 to absorb external shocks.

 Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

 

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