The Fed-review this week...

The monetary-policy review this week by the Fed is a major event which might trigger a renewed emerging market equity sell-off due to a strengthening US economy and improved economic indicators – wages, consumer-spending, inflation (CPI and Core CPI), unemployment and economic growth-rate – all point to a recovery which might push the Fed for a rate-hike soon, but may not be necessarily in the next meeting. The slowdown in Japan, Europe and then in China and the expansionary monetary-policy used by their central-banks may deteriorate exports by a further stronger dollar. A worsening external global economy especially weak Chinese growth and demand may force the Fed to tighten slow and delay rate-hike when they are hurting exports and growth. Nevertheless, the US is adding more jobs every quarter than expected by the Fed and wages have increased at a faster pace to increase wage-cost and inflation which is evident in the Core-CPI. Nonetheless, the households’ expectations about inflation have remained benign with low fuel or oil-prices which had been an important source of price-rise in the past. Oil-prices probably touched their bottom due to supply-glut and are likely to reach their peak very slowly when the shale-oil has a potential to increase supply in case of higher oil-prices. The higher cost of production of the shale-oil has helped other oil producing countries with low cost of production to retain their market-share by price competition and lower prices. However, the expectation that oil-price would again reach $ 100 a barrel is a very remote possibility in the next few years which could keep inflation expectations low with more shale-oil production at higher prices. Under these conditions we might expect the Fed to remain slow on rate-hikes, but full-employment and, wage-demand and inflation may push the Fed to increase the borrowing cost to avoid a wage-price spiral. However, the efforts to increase innovation and productivity through factor saving production-functions would help to keep inflation low in the future and boost production and growth in line with the demand.