A deja vu is awaiting...

In June the Fed in the US raised the repo-rate the third time on an out of policy date in the range 0.75- 1 % amid still low inflation and inflation expectations and repeated that the economic conditions, unemployment rate at 4.8 % and inflation near 1.6 % and wage pressure and consumer spending and a slow but steady improvement in the economic growth rate warrants only a gradual increase in the rate hike path in the event of falling natural or neutral real rate of interest, historically, and showed interest in unwinding the commercial banks balance sheet which might put an upward push on the interest rates globally due to the outflow of liquidity flowing from the emerging world and to higher differential interest rate in the developed economies and that might reignite the debate to “how to save the emerging world with the mass exodus of capital and deal with inflation, depreciation and higher interest in the emerging markets?” We might feel the déjà vu moment of the past taper tantrum. The safe haven status of the US dollar and government bonds might drive the capital back again in the US economy and increase savings which may not be good for spending, consumption and investment, which has also been held back due to inflation and inflation expectations by targeting the price-level at 2%. However, lower oil prices have helped lower inflation and inflation expectations, but higher real wages, through tight labour market, increase in the nominal wages and some due to lower price-level are more likely to increase spending and savings too. Nonetheless, the Fed has maintained an accommodative stance in the form of lower interest rate and only gradual rate hikes. It is important that the central bank try to increase spending by increasing real wages and lower inflation and inflation expectations might further boost spending or increase consumption and lower inflation and inflation expectation would also lower interest rate and interest rate expectations and increase investment spending.  At this moment not only the US economy needs lower interest rate, but the emerging markets, too, notwithstanding, external situation too should be a concern and only if the Fed tries to stabilize inflation and inflation expectations and interest rate and interest rate expectations that would help the both. A constant inflation and inflation expectations and interest rate and interest rate expectations might too help increase spending when real wages and incomes increase with increase in innovation and productivity. The US is trying to increase productivity and wage pressure on the price level when there is already a big gap in real wages and productivity since three decades which has depressed demand and prices. There is already a demand to increase minimum hourly wages to 16 dollars, it nevertheless could dent competitiveness, but lower borrowing cost could still make up the cost, countries that are capital rich could increase competitiveness by lowering the borrowing cost and provide free capital to increase value and rate of interest could be earned by the commercial banks on the value addition. Lower borrowing cost should be used to add or create value to capital and earn margins…