Higher wages might spur inflation in US, Fed to hike interest rates despite stock market meltdown

Higher wages might spur inflation in US, Fed to hike interest rates despite stock market meltdown

As the US is anticipating that rising wages might spur inflation in coming days, newly appointed Federal Reserve Chairman Jerome Powell has suggested that the Fed will go ahead with interest rate hikes despite the market turmoil.

By: FE Online | Published: February 14, 2018 6:49 PM

Higher wages might spur inflation in US, Fed to hike interest rates despite stock market meltdown (Image: Reuters)

Last week, there was a global stock market meltdown, which analysts have said was due to massive sell-offs on fears of higher interest rates by the United States’ central bank. As the US is anticipating that rising wages might spur inflation in coming days, newly appointed Federal Reserve Chairman Jerome Powell has suggested that the Fed will go ahead with interest rate hikes despite the market turmoil, Bloomberg reported.

Jerome Powell in his swearing-in speech said, “We are in the process of gradually normalizing both interest rate policy and our balance sheet… We will remain alert to any developing risks to financial stability.” In December, the US Federal Reserve had raised interest rates by 25 basis points to 1.5%, while also projecting three hikes this year.

The world is watching the US Fed Reserves’ hike as many developing countries, including India, have borrowed from the US heavily and the hikes will directly impact them. Reuters reported that policymakers are keeping a close eye on US President Donald Trump’s policies, including an increase in the fiscal deficit. The US Fed is expected to increase the pace of interest rates if inflation shows sign of take-off.

The jobless rate in the US is at a 17-year-low and one way to get workers or retain old ones at the job is to hike rates, which Jerome Powell, suggested could lead to higher inflation and so higher hike in interest rates. Analysts say that in short-term the economic scenario is fine but in the long run, it can chip away the wealth.

Meanwhile, in India, fears of higher inflation, especially at a higher level than RBI’s 4%, the target is putting pressure for higher interest rates. On February 7, the Reserve Bank of India, against expected hawkish tone, decided to keep rates on hold with the neutral stance of wait and watch policy. It, however, increased its projection for inflation between 5.1% and 5.6% for the first half of the fiscal year 2018-2019.

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