 "US Fed Reserve, Fed Reserve")
The United States Federal Reserve (US Fed) system is gearing up for its fourth meeting on the monetary policy for the country. The Fed’s consistent hike of interest rates has brought a lot of attention to the ongoing meeting, whose results will be made public on June 14.
According to a report by CNBC on Wednesday, Asian markets, as well as analysts, seem uncertain about the outcome of the meeting. Many expect the interest rate hike to take a pause after being consecutively increased for more than 10 months by the Federal Open Market Committee. However, the market still feels unsure about the outcome of the meeting.
What is the Federal Reserve System?
The Federal Reserve System is the central bank of the United States. Much like the Reserve Bank of India (RBI) it controls the country’s monetary policy and sustains the monetary stability in the country while looking out for public, governance, and economic interest.
The Federal Open Market Committee (FOMC), made up of 12 members, holds eight meetings (roughly every one to two months) throughout the year to review the country’s economic and financial conditions, determine the right course of action and discuss long-term economic goals.
The 12-member committee includes seven members of the board of governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, and four of the remaining eleven Reserve Bank presidents.
Increasing interest rate and credit rates
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The interest rate on reserve balances has consistently increased to 4.65 per cent in January, then to 4.9 per cent in March, and 5.15 per cent in May. These consecutive hikes are a result of the tightening of monetary policy by the Federal Reserve.
Similar to interest rates, the primary credit rate, which influences the lending costs for financial institutions, has also witnessed a series of increases in the rate.
It rose to 4.75 per cent in January to five per cent in March and 5.25 per cent in May. These trends indicated that the Fed may be trying to curtail borrowing.
Inflation at the root cause of hikes
These increases in interest rates appear to be due to inflation in the country. According to the Economic Times, the US Consumer Price Index (CPI) in May increased by only 0.1 per cent compared to the previous month, compared to 0.4 per cent in April. Consumer prices rose by four per cent in May compared to last year, down from 4.9 per cent reported in April.
Higher interest rates imply that the banks are encouraging people to save more and borrow less.
Expectations for the June 13-14 meeting
According to a Reuters report on Tuesday, June 13, analysts predict that the Fed may leave the current interest rates unchanged but tighten them in the following months as many members of the FOMC want to “take a pause”. The report also states that this may be the first time in 15 months that interest rates are not being affected. However, while many predict there may be a “pause”, analysts still believe that interest rates will pick up again in the following months. More skeptical analysts believe that the pause may not accomplish anything and if rates are likely to increase, it would be better for that to happen now than wait a few months and have a more steep rate hike.
How will this meeting impact India’s market?
The US Fed is one of the most important central banks in the world. The expectation, globally, is that the Fed will pause the interest rate hike, which would not affect the market as it is. This is because the US inflation rate has reportedly hit its lowest rate at four per cent since 2021.
However, the BBC reported on Tuesday that prices in many sectors of the US economy are still rising. Furthermore, the rate of increase is more than two per cent, which is the benchmark that the Fed considers "healthy".
Should the interest rates rise, this would have a direct impact on emerging economies such as India as it will impact the foreign capital flow in the country. As a report by Outlook explained in March, during the second meeting of the year, when interest rates are raised by the Fed, foreign investors are most likely to pull capital from emerging markets.
The increased interest rates in the US can also lead to India increasing its rates in response in order to maintain the value of the rupee by curbing the outflow of funds from foreign investors.
