The US Fed has announced the arrival of monetary policy reversal featured by rate hike. But it hinted the hike will be affected only from June this year and predicted a slow increase time table besides indicating a weak recovery of the US economy.
The net outcome of the Fed’s announcement on EMEs is that the market volatility and currency depreciation will be much smaller.
The significance of the monetary policy declaration on Wednesday is that the US economy is moving out of the low interest rate regime for the first time since 2006. An increase in federal rate will slow down capital flows to EMEs and more than that it will trigger a process of capital outflows.
At the same time the Fed officials have reduced the estimated rate hike to 0.625 percent for the end of 2015 from the 1.125 percent estimate. Similarly, weak recovery of the economy indicated by the Fed shows a chance for rather slow movement to normalcy (rate).
Altogether the impact of the newly announced monetary policy reversal package will be much softened on the EME economies including India. There was expectation of equity market crash, steep currency depreciation; but the Fed stance will definitely avoid a stampede.
Interestingly, the policy provides much relief to the EMEs and it shows that the US Fed is slowly establishing the central bank of the world by accommodating the concerns of the capital receiving countries like India.
