FOMC Meeting FAQs

When will FOMC taper off the asset purchase program?

Probably in the first half of the next year or may be even before that. It depends on how the US economy performs. This year is very important as for the economy is concerned since the Federal Reserve will watch the progress of the economy very carefully going ahead.

Under which circumstances will this happen?

The unemployment rate in the US has come down from over 10% in 2010 to 7.6% as of 2013. The Fed had earlier clarified that it will reduce the rate of asset purchases if the unemployment rate touches 6.5%-6%. It has now said that it may vary the rate of the asset purchases if the unemployment rate touches 7%.

When is it likely to happen?

Well, as per the Fed's projections, the US economy is likely to report an unemployment rate of 7.2-7.3% in the fourth quarter of this year. Further, it will decline it to 5.8% to 6.2% in the last quarter of 2015. This means that early next year in the March quarter, the rate may touch 7% from when the pace can be slowed down and as said earlier, it may end it by the second quarter of 2014.

What do you think of the US economic growth?

The US has been going through a bumpy recovery and has reported a good set of numbers. Inflation projections for the year 2013 stands at 0.8-1.2% and will rise to 1.6-2% in 2015. This is in line with the long-term inflation projections. The economic growth in the US would also be at 2.3% to 2.6% in 2013 and will increase to 2.9% to 3.6% in 2015. The positive housing data and rising consumer confidence will lead to an improvement in the labour market conditions in the US which will help it strengthen its economy.

Will the Fed terminate the QE even if the recovery is not in line with the expectations?

It will not. The policy is not predetermined. The Fed will monitor the situation and will take a policy stance accordingly. If the recovery does not meet expectations, it will continue with the current purchases. It the recovery is faster, it will terminate the QE earlier this year as well.

What about interest rates in the US?

Interest rates in the US have not increased in many years now and remain at the historically lowest rate. So far, there has not been any buzz of increasing the rate. It is estimated that the interest rate tightening may begin only by 2015.

So why has the rupee fallen?

Quantitative Easing has been a major driver of the global markets. The near zero interest rates in the US have seen an outflow of the funds out of the country. This capital eventually has found countries like India where yields are around 8% or may be higher. With the expectations of a reversal of the monetary policy in the USA, foreign funds are selling their positions in the Indian debt markets which have put a pressure on the rupee; which is why it is trading at the lowest levels. There are other factors as well, such as the widening current account deficit (CAD) and the difficulty in refinancing external debt.

What is the impact on India?

Well, volatility is at the top right now. The markets, going ahead, may test the nerves of investors. Commodity prices may fall due liquidity constraints but the rupee may cap gains. Corporates having exposure to foreign debt may see a rise in the interest cost in rupee terms. Besides, imports would be costly which means that the input prices for many companies will rise. Inflation may further show rising trends, leaving the RBI with limited options.