Focus Should Be On Bolstering Economic Growth And International Trade

It is therefore clear that there are uncertainties not only for the US but also for other countries, including China, Europe, UK, Japan and India as to how these uncertainties will be navigated and whether the current pause period will suffice for them to arrive at mutually acceptable tariff levels

As was expected, Federal Reserve Governor Jerome Powell, along with the Board of Governors, in their May 7 meeting decided to continue the pause as far as interest rates were concerned by maintaining the federal funds rate at 4.25 per cent to 4.5 per cent. In its FOMC statement, the Fed stated that the unemployment rate has stabilised at a low level in recent months and the labour market conditions remained solid. However, inflation remains somewhat elevated.

It may be recalled that the Fed has a mandate to control inflation and its target for inflation is below two per cent and maximum employment. The number of unemployed increased by 82000, to touch 7.165 million, while unemployment grew by 4,36,000 to reach 163.944 million.

Inflation rate, consumer price index, a broader measure of goods and services cost across the US economy, fell a seasonally adjusted 0.2 per cent in March, fell to 2.4 per cent in March, lower than expected, which is down from the 2.8 pr cent in February.

The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities. It reiterated its commitment to supporting maximum employment and returning inflation to its targeted two per cent.

Powell told the media later that the “risks of higher unemployment and higher inflation appear to have risen. We believe that the current stand of monetary policy leaves us well positioned to respond in a timely way to potential economic developments."

It may be recalled that due to the Trump administration's high tariffs trade policy, uncertainty and the unsettled trade war issues between the US and China, it is likely that there will be any substantial price rise in the US as it is a major consumer of world's products. There will be a gap between demand and supply leading to inflation expectations being high. Moreover, it is also already predicted that the country’s economy is likely to suffer in terms of GDP growth of more than one percent, which some believe may lead to recession. It is not likely now, but lesser economic activities will result in less jobs due to which the unemployment rate may go up. This fear has seemingly led to the current pause.

As for the GDP growth, which was 2.5 per cent last year, it has edged down in the first quarter of the current year. Private domestic final purchases, or PDFP, which excludes net exports, inventory investment and government spending - grew at a solid three per cent in the first quarter, the same as last year.

Another important point to be noted is that there has been a sharp decline in sentiment and elevated uncertainty about the economic outlook, largely due to trade policy concerns. It is, therefore, uncertain how the future will evolve as to future spending and investment.

The new administration is in the process of implementing substantial policy changes in four distinct areas, according to Powell. They include trade, immigration, fiscal policy and regulation. These changes could result in greater uncertainties and their effects on the economy remain highly uncertain.

It is to be watched whether the price rise on account of higher tariffs will be a one-time increase or remain persistent, which will depend on the size of the tariffs effects and the time it will take.

According to Powell, they find themselves in a challenging scenario as the dual mandate of Fed, maximum employment and less than two per cent inflation are problem areas. Until the future evolving situation is clear, the Fed is well positioned to wait for greater clarity before considering any adjustments to the policy rate.

Meanwhile, the Fed is not in a hurry to reduce policy rates now as they wish to be patient and the future data will be watched to get a clear picture of the stance as regards the monetary policy.

With the ongoing discussions with various trading partners by US administration, it will be clear in the future as to the level tariffs will settle and it is better to wait for a clear view on this front, clarified Powell.

Regarding the question as to any cut in policy rate at all this year, the Fed Chair stated that unless it is clear how these uncertainties will be settled and their implications on and employment inflation, “I couldn't confidently say that I know what the appropriate path will be." Regarding Trump’s expectations of lower interest rates, Powell stated that the Fed always uses tools that foster maximum employment and price stability for the benefit of American people. He further reiterated that they will only consider economic data, the outlook, the balance of risks. Hence any request for cutting interest rates by President Trump "does not affect either our job or the way we do it."

It is therefore clear that there are uncertainties not only for the US but also for other countries, including China, Europe, UK, Japan and India as to how these uncertainties will be navigated and whether the current pause period will suffice for them to arrive at mutually acceptable tariff levels. How it will evolve and at what level will it have an economic impact on every country’s growth. However, it is advisable to clear up the uncertainties at the earliest and focus on economic growth as well as better global international trade for the betterment of all concerned.

Over and above the tariff issue, the ongoing geopolitical tensions namely Russia-Ukraine as well as Hamas and Israel, still show no signs of an early settlement. They have a greater impact on supply chain management as well as economic costs over and above the loss of lives. There is also added danger of climate change, which poses significant concerns for the world as they impact global ecosystems, human health and societal structures. The ongoing high global temperatures, extreme weather events, rise of sea levels and disruptions to the ecosystem and agriculture, will lead to displacement and economic hardship.

(The author is former Chairman & Managing Director of Indian Overseas Bank)