- People in the know would vouch in agreement that the economic situation around the globe is anything but conducive. The economic challenges of the last three-plus years owing to a variety of reasons including the pandemic meltdown and the Russia-Ukraine conflict have rendered every country worth its salt in a firefighting mode. The debilitating effects of the disruptions in the global supply chains are manifolds further suffocating the already suffering humankind into an even more submissive state. Governments across the world are still grappling to emerge from the far-from-ideal situation and the respective central banks are initiating measures vis-à-vis fiscal and monetary policies to tide over the crisis. But have they been successful? Not at all.
PC: Freepik
- The Indian political leadership at the helm was off the block in initiating several effective fiscal measures at the height of the pandemic. However, the Russia-Ukraine conflict did emerge as a great dampener what with the volatility in the financial sector leading to inflationary trends. Undoubtedly, India did much better than other countries in comparison but far from claiming to be out of the woods even as we read. Looking around the world would show how things are panning out much to the discomfiture of all concerned. The financial sector heating up has become a common factor. In a week, the hot-button issue in financial markets has shifted from central banks increasing interest rates to commercial banks collapsing.
- Indeed, three US banks have collapsed and a fourth, First Republic Bank, has received an injection of $30 billion from a consortium of banks. In Europe, Credit Suisse had to borrow $54 billion from the Swiss central bank. If it feels like 2008 again, there’s one institution whose performance has brought back dormant anxiety. US Federal Reserve. Following the 2008 global financial crisis, the US Fed unleashed waves of liquidity through a process known as quantitative easing (QE) to deal with the crisis of its own financial intermediaries. But given the scale of the Fed, its QE had spillover effects on emerging markets like India. Think of the taper tantrum of 2013 when the Fed’s communication caused swings in capital flows and foreign exchange markets.
PC: Freepic
- Post-Covid, it unleashed a loose monetary policy, then reversed course after misreading the underlying nature of inflation. The Fed embarked on a most aggressive policy of interest rate hikes. It’s led to predictable financial instability, something Indian regulators could publicly forecast. The moot point to ponder over here is why couldn’t the Fed be ready. It’s inexcusable that the Fed’s supervisory regime didn’t have a plan for banks likely to struggle in the wake of a fast-paced monetary tightening. Financial instability spills over to both the real economy and other countries. Consequently, economies such as India have an additional challenge to cope with in a year of slowing growth momentum. The Fed needs to get its supervisory act together.
