High growth and inflation in the US and in INDIA are due to low inflation and growth base last year... According to the chain based index method... low inflation base would show high inflation relatively when it normalises or bounces back, same with the growth rate... it's because prices and growth fell last year compared to two years back when growth rate was high and this year's growth rate has a low base last year...
By the next year inflation would be lower given the high base this year, every year the base year changes according to the chain based method, low base last year shows higher inflation this year and high base last year shows low inflation this year... Time consistency of economic policies is a problem while framing polices...
The Fed is (un)knowingly creating volatility in the markets by managing the money supply and interest rate and price or inflation expectations, though interest rate is also a price which is variable and not sticky, while price of borrowing determines all other prices...
Otherthings remaining constant, if prices or inflation increase it cuts the value of money or debt and lower real interest rate which discourages savings and encourages spending, both investment and consumption...
But, if the Fed increases interest rate, the above adjustment would not happen, because it would keep the real interest rate high or constant, if we assume the nominal interest rate would increase equal to inflation...
Nonetheless, if the Fed commits a low and stable interest rate inflation or prices could help the above adjustment and reduce volatility... The Fed's policy should be consistent to increase its credibility...
Inflation reduces the real value of debt and increases spending... It cuts all the three real interest rate, real wages and real exchange rate which means more demand and spending...
Under this scenario higher borrowing cost could disrupt supply side mechanism and employment and demand, too, further increasing prices, higher borrowing cost reinforces higher prices...
If the central bank could commit stable interest rate, both consumption and investment spending may increase...To stabilise the current situation stability in policy is important...
The Fed shall first try to stabilise the money supply and interest rate and inflation for stable interest rate and inflation expectations which are important for spending decisions and achieve full employment...
The specter of tapering is quite a past, it has not happened and still uncertain given high unemployment in the US... Markets could rejoice...
It was a very good monetary policy as far as its effect on investors is concerned...
It said that the timing of the tapering is still uncertain and it expects two rate hikes at the end of 2023 which should be taken with a big grain of salt...
The US' growth outlook has been impressive and the monetary policy would remain accommodative unless success is made on the unemployment front...
The communication was clear that for quite some time more it would continue with its accommodative stance...
It shall commit a stable monetary policy in order to stabilise expectations at the current level... Higher borrowing cost could reinforce lower supply and higher prices and expectations...
USD is the most bullish currency of the world; it is also considered a safe haven investment along with the US treasuries... The US stocks, too...
Subbarao (former RBI Guv) has said that the RBI prints money to conduct different operations... Unemployment and demand has gone down in the country, higher unemployment also means that production and supply have also gone down...
INDIA lacks a proper unemployment benefits or insurance system... This is a high time the govt reform the labour code by introducing a contingency programme for the unemployment due to lockdown...
Like it has introduced crop insurance to handle uncertainty it may implement unemployment insurance... To fill the gap the govt may print money and provide capital for the unemployment insurance, because poor and unemployed need money for survival and subsistence... there is no doubt... as the unlock happens and supply improves...
Unemployment benefits or insurance in times of slowdown and crises would help survival and demand... and would also help flexible labour laws...
INDIA's health care infra is weak, the govt must buckle up for any probability of any third wave...The govt shall provide some compensation or unemployment benefit for subsistence, this long pending, even the flexible labour laws need, unemployment insurance...
Longer time horizon means more time for uncertainty... Analysts could make better prediction in the short run based on evidences... They must highlight the rational expectations that could prove to be self-fulfilling...
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