The U.S. Federal Reserve has resumed normal monetary service by raising interest rates for the second time in three months. The Fed’s decision on 15 March 2017 reflects its confidence in the continuing expansion and signals that its efforts to relate the world’s largest economy are largely on track – with overall inflation seen to be stabilising around its longer run target of 2% over the next couple of years. Significantly, Chair Janet Yellen stressed that policymakers expect the strengthening economy would warrant “gradual increases” in the benchmark federal funds rate to ensure that the monetary policy stance remains accommodative of growth, even as price stability is ensured. This emphasis on ‘gradual’ provides a degree of policy predictability that markets, for now, can broadly factor in two more rate increases of one quarter of a percentage point each for the rest of 2017 – especially when coupled with a median projection for the signalling rate to reach 1.4% at the end of the year, from the current 0.75%-1.0% range. The statement has allayed fears of an accelerated rate normalisation, that could have triggered a sharp jump in outflows from emerging markets such as India. Investors worldwide are bound to feel more reassured that one of the world’s key economic engines is in good shape and that should bode well for global demand. India’s exporters, including of software services, are also likely to see a silver lining in the Fed chief’s reference to a distinct firming in business investment, after having been soft in 2016, that has helped put business sentiment at “favourable levels”.
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Source: PP FEED