Hawks are winning1 min read 03 Nov 2022, 10:59 PM IST
As of now, price stability seems a bigger concern for central banks than a likely recession caused by their policy squeeze
The US Federal Reserve’s three-quarters of a percentage point increase in its target Fed funds rate was widely expected. What financial markets were keen to know was how close this rate had come to its peak in this bout of the Fed’s battle against inflation. The answer left market participants worried, as Jerome Powell, the Fed’s chairman, suggested that it would be “premature" to pause monetary tightening. Interest rates, he said, will ultimately be “higher than previously expected". Stock markets were rattled. The Bank of England also hiked its rate soon after, its largest hike in over 30 years. As of now, price stability seems a bigger concern for these central banks than a likely recession caused by their policy squeeze. In India, too, our general price level has been above the upper limit of the official target for many months, though it’s not as dramatic a breach as in the West. That may explain why the Reserve Bank of India’s 190 basis points cumulative rate increase since May has not kept pace with the Fed’s three percentage point upward move. A widening gap, though, can draw capital out of India. And it’s unsafe to count on the Fed’s resolve flagging before price stability is attained.