US Fed Comments Infused “Substantial” Global Volatility : RBI Governor
US central bank Chair Jerome Powell said the US central bank won't back off in its fight against rising inflation and the economy will need tight monetary policy "for some time" before inflation is under control.
The commentary from the US Federal Reserve at the recently-held Jackson Hole conference on the future trajectory of US monetary policy has infused substantial volatility into global financial markets, said the Reserve Bank of India (RBI) Governor Shaktikanta Das.
Jackson Hole is the US Federal Reserve’s annual economic symposium where policymakers and businesses discuss the key global macro economy and provide an outlook of what the situation may look like going ahead.
At the conference, US central bank Chair Jerome Powell said the US central bank won’t back off in its fight against rising inflation and the economy will need tight monetary policy “for some time” before inflation is under control.
“Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said at the conference.
Powell’s comments essentially meant Federal Open Market Committee’s focus right now is to bring inflation back down to the 2 per cent target.
“…while forward guidance can be a useful policy instrument in an accommodative monetary policy phase, it can be quite difficult to provide coherent and consistent guidance in a tightening cycle,” said the RBI governor.
Das made the remarks at an event organised by the Fixed Income Money Market and Derivatives Association of India (Fimmda) in Mumbai on Monday.
He went on to say that the difficulties get further compounded in the current environment of high uncertainty and such forward guidance may even have destabilising effects on financial markets, especially if the subsequent policy actions are at variance with earlier pronouncements.
“Central bank communication in the current context has thus become even more challenging than the actual policy actions,” he said, adding that experience tells that markets often tend to overreact to new information, which amplifies volatility.
To put things into context, Indian stocks had a sharp slump right after the US Fed chair’s comments but later recovered from the lows.