The question of US monetary policy

News: Headline inflation in the US has reached 6.8%, the highest value in 40 years.

In this context, if the US Federal Reserve resort to monetary tightening policy (Fed Tapering) to control inflation, it will have important consequences for the world economy.

What are the implications of Fed tapering?

Flight of capital from the emerging markets: High interest rates in the US suck capital into the US.

Value Erosion: In international asset pricing, the cost of capital goes up, and the net present value of Indian equities will decline.

Financial Scandals will get exposed: Many dubious schemes fall apart, as we saw with the financial scandals in India from 2008 to 2013.

Autonomy of monetary policy: The retreat of capital will generate currency depreciation. To fight the currency depreciation, high interest rate hikes are required, which is often harmful for the local economy.

Source: This post is based on the article “The question of US monetary policy” published in Business Standard on 13^th Dec 2021.