What did the Fed announced in its minutes and do you see the Fed minutes impacting the RBI policy stance?

As is the norm, the Fed publishes the minutes of the Fed meeting, exactly 21 days after the conclusion of the meeting. Accordingly, the Fed announced the minutes of the FOMC meeting held of 15-16 December on the 05th of January. It was not just hawkish, but extremely hawkish and aggressive. Here is what the Fed said.

a) Fed pointed out that the economy was closer to full employment that it ever was in the last 2 years and saw that as adequate to start the rate hikes. In short, the Fed is not going to wait for jobs to get back to pre-pandemic levels. This is good enough.

b) The liquidity glut is a major issue for the Fed as it is distorting asset prices across equities and real estate in the United States. The time table for tapering and rate hikes was already front-ended to March 2022. Now it looks like it may happen ever quicker.

c) As the taper ends by March 2022, the Fed may not wait too long to hike rates and it may actually commence immediately. The reason is the inflation, which at 6.2% is already the highest since the Volker era inflation last seen about 40 years ago.

d) Above all, the Fed has deliberately dropped any reference to inflation as being “transitory”. Fed admits the inflation is due to supply chain disruptions and rising demand, but is reconciled to inflation staying at higher levels for much longer.

Let me now turn to the RBI stance as an outcome of Fed minutes?

RBI December policy may have been more like a dry run driven by the concerns over Omicron virus. In last 1 month since the RBI policy was announced, Omicron cases have only gone up sharply. However, this may not be a constraint for the RBI when it again takes up the monetary policy review on February. That may be a more decisive policy.

Ideally, the RBI would have adopted a more pragmatic approach to rates and has not been keen to hike rates without clear indications that growth will not be hampered. The MPC has already hinted in the December policy that February may see more hawkishness and the Fed minutes only enhance that probability.

However, it must be remembered that even in the past, there has been a huge gap between what the US purported thinking and their action points. However, RBI is going to have a lot more sticky questions to answer, when it comes to inflation and rates.