The current environment
of the global economy is of uncertainty and fear and anxiety due to the
protectionist waves and trade wars that are likely to hurt competitiveness and
productivity and demand due to higher tariffs and retaliatory tariffs and
setback to the supply value chain which might increase unemployment due to
disruption and would precede or followed by higher prices and price
expectations which could lower demand and growth and expectations. In short,
trade wars would be costly and contractionary for the global demand and the
stock market around the world, we have seen a fair amount of correction in the
stock market since the US President announced tariff on the Chinese products
and violation of the patents rights on technology.
Moreover, the strong US
economy and higher inflation and inflation expectations have increased the
interest rate hike and hike expectations, though gradually, but the withdrawal
of the quantitative easing accommodation could further drag the already recovering
slow global growth. The gradual reversal of the monetary accommodation after
the 2008 crisis is yet to play out since it would increase both interest rate
and expectations and strong dollar and expectations and would hurt the domestic
and external US economy and lower investment would afflict the other economies,
and together the global growth.
The job of the Federal
Reserve is not only to restore equilibrium, price stability and full employment
within the economy, but also the outside world which are attached due to
capital flows after the quantitative easing and ultra low interest rates which,
now, have an upward bias due to tight labour market and higher wage cost and
inflation and would slow the fragile recovery in the investment partners or
borrowers economy and growth, globally. A higher interest rate and rate expectations
and currency demand could further aggravate the problem, out flow of the dollar
would increase inflation and depreciation in the trading and investment
partners’ economy which would also increase imports and current account deficit
in the US too…
The RBI might try to
stabilize expectations when the inflation has an upward bias to the upside
target at 4.44% percent within 4 +/- 2% band, lower than 5%, nonetheless, a 25
basis point cut could prove to be a booster for the market, especially when the
stock market is reeling under the trade war and uncertainty... but, the
expectations that the income and pay push by the government could increase
inflation, notwithstanding a lower borrowing cost could also help increase
supply and contain prices... Sometimes, the reverse monetary policy also works,
when the central bank increases money supply it reduces the borrowing cost and
increase supply and lowers the price level before full employment....
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