Bracing for short-term volatility
In light of the imminent US FOMC meeting at the Federal Reserve, there is a growing apprehension that India could get caught in the cross currents of short-term volatility.
Most people are aware that there is a government body that acts as the guardian of the economy - an economic sentinel who implements policies designed to keep the country operating smoothly. Unfortunately, most investors do not understand how or why the government involves itself in the economy. In the U.S., the answer lies in the role of the Federal Reserve, or only, the Fed. The Fed is the gatekeeper of the U.S. economy. It is the bank of the U.S. government and, as such, it regulates the nation’s financial institutions. The Fed watches over the world’s largest economy and is, therefore, one of the most powerful organizations on earth.It goes without saying that whenever the economy of the United States of America coughs the global economic system goes into a respiratory arrest. Given China’s recent devaluation of the Renminbi recently it is not surprising that the world is looking towards the all-important meeting of the United States Federal Reserve. The Federal Market Open Committee(FOMC) which sets official interest rates. After its last discussion the all-powerful United States. Advocates of a hike say what is holding the economy back is flaccid growth in demand and misguided policy from Washington. This policy maneuver includes allowing tax breaks that encouraged capital spending to expire at the end of 2014 and endless budget battles in Congress. None of those problems is being addressed by near-zero interest rates.Dow closes up triple digits as stocks rally more than 1percent ahead of Fed. Markets are poised for a relief rally even if the Federal Reserve hikes interest rates for the first time in nine years, and it is likely the US central bank will do it, to call the bluff of scaremongers. f you look at Stanley Fisher’s statement at Jackson Hole, Wyoming, he clearly said that the forces holding down inflation are fast dissipating, and the effects of high dollar and weak oil prices that are keeping inflation down are diminishing. So, the US Fed’s inflation Index that they carefully watch, personal consumption expenditure is today at 1.2 percent lower than the two percent target that they have. Fed has also said that it takes 15-18 months for any rate increases actually to trickle down into the real economy. Throughout history, free market societies have gone through boom-and-bust cycles. While everyone enjoys good economic times, the downturns are often painful. The Federal Reserve was created to help reduce the injuries inflicted during the slumps and was given some powerful tools to affect the supply of money. The FOMC typically meets eight times each year. At these meetings, the FOMC members decide whether monetary policy should be changed. Before each meeting, FOMC members receive the “Green Book,” which contains the Federal Reserve Board (FRB) staff forecasts of the U.S. economy, the “Blue Book,” which presents the Board staff’s monetary policy analysis and the “Beige Book,” which includes a discussion of regional economic conditions prepared by each Reserve Bank. When the FOMC meets, it decides whether to lower, raise or maintain its target for the federal funds rate. India could consider a Tobin Tax in this regard.Tobin Taxes are excised taxes on cross-border currency transactions. They can be enacted by national legislatures, followed by multilateral cooperation for effective enforcement. The revenue should go to global priorities: basic environmental and human needs. Such taxes will help tame currency market volatility and restore national economic sovereignty.