What are some of the key takeaways for India from the Fed minutes announced on Wednesday night?

It may be recollected that the 2-day Fed meeting had concluded on 27th July. The US Fed normally publishes the minutes exactly 21 days after the meeting. RBI actually publishes the minutes in 14 days itself. Fed has already hiked rates by 225 basis points in last 4 meetings of which, 150 bps hike happened in June and July. The crux of the minutes is that the members of the FOMC are unhappy with the pace of fall in inflation. While they are now going to be data driven, it is unlikely that rate hikes will relent before end of the year.

Fed rates are already at neutral rate zone of 2.25% to 2.50%. Hence, going ahead, the pace of rate hikes would be more calibrated and data driven. Just a quick comparison. Back in the 1980s, when inflation at above 9%, the Fed rates were in double digits. Today with the same inflation the rates are nearly 600 bps lower. FOMC members are betting on rate hikes to be done by end of 2022 at around 3.75%. This will give them room to even do a shift in stance if necessary. In 2022 alone, there are 3 more meetings left till December 2022.

The CME futures barometer shows another 125 bps rate hike in 2022 and that would take the rates to the range of 3.50% to 3.75%. So September could at best be 50 bps rate hike followed by 50 bps in November and 25 bps in December. At that point, Fed may have to make a choice between inflation control and growth quite seriously. Some members are in favour of rapidly moving into restrictive zone, but even Jerome Powell would tread more carefully from here on. From neutral zone, rate hikes have implications for GDP and jobs.

The good thing is that, the RBI has not been quiet either. It hiked rates by 40 bps in May 2022 and 50 bps each in June and August 2022. If you add to this 140 bps rate hike, the CRR hike and the SDF base hike, there is lot of hawkishness shown by RBI also. Hence there is no immediate risk of any risk off flows from India getting accelerated. In India, retail inflation fell 108 bps in 3 months and WPI inflation fell 270 bps since June. Certainly, the RBI hawkishness has been delivering the goods. If the Fed goes slow, India should be happy.