US Fed rate hike: How is it going to influence RBI?
US Federal Reserve has increased federal funds rate by 25 basis points to 5.25-5.5%—the highest level since 2001. Since the Fed sets the direction of interest rates globally, Mint examines what this means for India and what the future looks like. The federal funds rate is the rate at which commercial banks in the US lend money held with the Federal Reserve system to each other on an overnight basis.
The Fed has raised this rate 11 times since March 2022. Before the hikes started, the rate had stood at 0-0.25%. The hikes have been carried out to control inflation which had been at decadal high levels in the aftermath of the pandemic.
At higher interest rates, people will borrow and consume less and companies will borrow and expand less, hopefully bringing down retail inflation in general and wage inflation in particular. As Fed chairman Jerome Powell put it: “Some further rate increases will be appropriate this year." This is because the rate of inflation is still nowhere near the Fed’s favoured rate of 2%. When it comes to measuring retail inflation, the Fed follows the core personal consumption expenditures (PCE) index, stripped of food and fuel items.
In May, this core inflation stood at 4.6%, which was lower than the 4.7% in April, but still on the higher side. In fact, in May 2022, the core inflation had stood at 4.9%. This suggests that core inflation is falling at a slow pace, explaining why the Fed will continue to raise rates.
The covid-19 pandemic disrupted supply of goods, pushing up prices. The supplies have now eased. Nonetheless, they are not back to pre-pandemic level.
Second, home prices shot up. Higher rates have led to the median home price falling by more than 13% from the peak level. The trouble is
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