World markets have been reacting and were prepared to digest the news, but Fed’s decision came as a shocker. Federal Reserve Chairman Ben Bernanke signaled it a few moths earlier that Fed was going to reduce its massive quantitative easing in the month of September. From that time on-wards major economies around the globe started reacting to the news and their respective central banks were too getting ready in anticipation of Fed’s move.
Emerging markets and their currencies were hurt badly during this span as Bernanke’s signal meant cheap dollar flow from the United States to emerging nations would come down and/or stop gradually.
How big is $85 billion for Indian markets?
If we talk about Indian Rupee (among the biggest looser during this time span), which fell to record lows against the dollar before the FOMC meeting, has started recovering back after the Fed’s decision. Lets try to compare this: India’s biggest ever infra project to build 24 new cities between Delhi and Mumbai (DMICDC) which is expected to end by 2040 ( 27 years from now) is expected to come at a cost of $100 billion. And on the other hand US Fed injects $85 billion every months.
So even if India receives a smallest portion of this $85 billion, it matters a lot to the dollar starving Indian economy. As India’s current account deficit along with surging oil price and domestic food inflation has added a lot to RBI’s worries. According to the analysts rupee which was oversold earlier should gain its honor back in the coming months.
QE and Fed Signals
Many policymakers and regional Fed chairmen in the United States have been talking about the fact that the decision on how Fed should signals the reversal of QE is as important as the reversal of QE itself. Bernanke has seen the effects of his signals and that’s why very cautiously he added after the FOMC meeting that there was no schedule of tapering the Fed policy as of now, as the Fed wants to wait for some more time and track the economic recovery.
Fed has made a wise decision to hold any tapering at this time, while markets around the globe are already concerned about:
1. Ongoing unrest in Syria and Obama’s interest in the same.
2. US debt ceiling issue and Obama’s Healthcare Plan
3. Who is going to be Ben Bernanke’s successor in the month of January next year after
Lawrance Summers (Obama’s Favourite) withdrew himself from the battle.
So debate is still open if Fed would change its policy by year end or Ben Bernanke is going to hand over the reins to his successor (Janet Yellen, now vice chair, if she gets selected would become first female to lead one of the world’s most powerful central banks) and leave the most challenging decision open to her.
Ideally if Fed decides to taper its policy without sending any distressing message around the world markets, the following could be an option:
1. Fed might start tapering its bond buying by a small amount (say $5 bln and come
down to $80 bln from $85 bln) every month for a quarter or so and move on gradually
to next level.
2. In the second quarter reduce the monthly stimulus by $10 billion ($70 bln) in the first
month and $5 bln every month for the subsequent two month, i.e. $65 bln for second
month of second quarter and $60 bln for the third month of second quarter.
Like wise depending on the response from local/ global markets and after analyzing economic readings Fed could decide the future course of action.
This would give enough time to global stakeholders to understand, inter-prate and digest the news.
No doubt the Federal Reserve has to make it clear in advance that it would not hesitate to revert any of its actions in case of adverse effects.
