U.S. Fed to hold rates low as economy slowly improves

A television indicates that the Fed will keep interest rates unchanged on the floor of the New York Stock Exchange in New York on Tuesday

Interest rates will be held in the range of 0-0.25 per cent for an extended period in anticipation of “low rates of resource utilization, subdued inflation trends, and stable inflation expectations”, the United States Federal Reserve’s said

Interest rates will be held in the range of 0-0.25 per cent for an extended period in anticipation of “low rates of resource utilization, subdued inflation trends, and stable inflation expectations”, the United States Federal Reserve’s said today.

Following the Fed’s announcement, equity markets closed at an 18-month high and US Treasury yields declined, according to reports.

The Fed’s Federal Open Market Committee, which last met in January, hinted at improving conditions in the U.S. economy, pointing out that business spending on equipment and software rose “significantly” and household spending expanded moderately. However the latter remained constrained by high unemployment, modest income growth, lower housing wealth, and tight credit, the FOMC cautioned.

The FOMC added a note of explanation on its efforts to bolster the mortgage finance market through credit securities purchases. “To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt,” it said.

Commenting on the overall macroeconomic picture the FOMC said that economic activity continued to strengthen and that “the labor market is stabilizing”. However, it added that employers remain reluctant to add to payrolls. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

Nine out of ten members of the FOMC voted for the FOMC to hold rates low. The one dissent vote came from Thomas M. Hoenig, who held that “continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the build-up of financial imbalances and increase risks to longer-run macroeconomic and financial stability.”

Summary of Economic Survey 2009-10

The Economic Survey presented to Parliament today says that the economy has bounced back from the global economic slowdown and is on its way to the growth path of 9 per cent. The CSO estimate of 7.2 per cent GDP growth for 2009-10 reflects the fast paced recovery given the Index of Industrial Production (IIP) posting a record 16.8 per cent year-on-year growth during the month of December 2009. The Survey says that the economy has responded well to the policy measures undertaken in the wake of global financial crisis. It says, the adverse impact due to the delayed and sub-normal monsoon has been contained to a large extent and a better than average rabi agricultural season is expected. The Survey says that the recovery is well founded with pick up in merchandise exports, capital flows and non-bank food credit.

The turnaround came in the second quarter of 2009-10 when the economy grew by 7.9 per cent, year-on-year basis. The CSO estimates forecast 7.2 per cent growth in GDP with industrial output growing at 8.2 per cent and service sector at 8.7 per cent. The recovery is particularly impressive despite a decline of 0.2 per cent in agriculture output primarily due to sub-normal monsoon. The Survey says, the broad based nature of the recovery creates scope for a gradual roll back, in due course, of some of the measures undertaken over the last 15 to 18 months to put the economy back on the growth path of 9 per cent.

The Survey expresses concern over the emergence of high double-digit food inflation especially in the second half. Food price inflation stood at 17.9 percent for the week ended January 30, 2010 while the inflation in fuel, power, light and lubricant at 10.4 per cent. It says that the significant part of this inflation can be explained by supply side bottlenecks in some essential commodities. Since December 2009, there have been signs of these high food prices, together with hardening of non-administered fuel prices, getting transmitted to other non-food items. This has created some concerns for higher than anticipated generalized inflation over the next few months.

The recovery in GDP growth as indicated in the CSO advance estimates is broad- based with 7 out of 8 sectors/sub-sectors showing a growth rate of 6.5 per cent or higher. The per capita growth in income has recovered to 5.3 per cent in 2009-10 from 3.7 per cent in the previous year. The per capita consumption growth as reflected in the private final consumption expenditure shows a declining trend since 2007-08.

The Survey says that the country received 23 per cent less rainfall during the south-west monsoon 2009 but some of the shortfall was made up during the post monsoon season when the country received 8 per cent excess rainfall. Kharif 2009-10 season showed a decline of nearly 6.5 per cent in acreage with the entire decline confined to rice crop. While the decline in Kharif acreage under pulses was 5.63 per cent, some of this decline has been made up in the rabi season. As per the available estimates, wheat, pulses and groundnut have seen an increase in acreage as compared to last year.

The growth of broad money (M3) has moderated from around 21 per cent in the beginning of fiscal year to 16.5 per cent by mid January 2010 and it has remained below the indicated growth projection. While in the first half of the year, credit to the Government remained the key driver of money growth, it has moderated since the third quarter of 2009-10. The Survey says that since the outbreak of the global financial crisis in 2008, the RBI has followed an accommodative monetary policy supporting early recovery of the growth momentum. This has also facilitated the unprecedented borrowing requirement of the Government to fund its fiscal deficit. Nearly two third of the borrowing of the Government was completed in the first half of the fiscal year which not only helped in checking pressure on interest rate but also created space for the revival of private investment demand in the second half of the year. The fiscal expansion undertaken by the central government as a part of the policy response to counter the impact of global slowdown has resulted in increased fiscal deficit from 2.6 per cent in 2007-08 to 6.5 per cent in the Budget Estimates for 2009-10.

The Survey says that the recommendations of the Thirteen Finance Commission have to be taken on board in shaping the fiscal policy for 2010-11 and in the medium term. The Finance Commission has recommended a calibrated exit strategy from the expansionary fiscal stance of 2008-09 and 2009-10. It has also suggested that the revenue deficit of the centre needs to be progressively reduced and eliminated followed by emergence of revenue surplus by 2014-15.

The Survey notes with satisfaction that several factors that have emerged from the performance of the economy in the last 12 months augur well for the Indian economy. The gross domestic savings as a percentage of GDP stands at 32.5 per cent in 2008-09 while the gross domestic capital formation stands at 34.9 per cent. These figures compare favourably with some of the fastest growing economies. It also underlines the significance of the presence of Indian corporations in the global market place. The Survey is hopeful that the economy will go back to 9 per cent growth rate in the medium term. This follows the revival in investment and private consumption demand impressive growth in exports in November and December and remarkable turn around in Core infrastructure sector. It says, after a set back agriculture is gradually getting back to the projected path and with a reasonable one per cent additional growth in GDP coupled with recovery of global economy, the Indian GDP can be expected to grow around 8.5 per cent +/-0.25 per cent. With full recovery the economy can breach the 9 per cent mark in 2011-12. Given the steadily improving fundamentals of the economy, the Survey says, if there are improvements in infrastructure, both urban and rural, and reform in governance and administration, it is possible for India to move into double-digit growth and even become the fastest growing economy in the world within next four years.

.India pleased as G20 summit scales new height

Pittsburgh: The G20 inverted an apparently iron law of multilateral summitry — that the significance of a final statement is inversely related to its length — by turning in a bulky communiqué at the end of its summit here on Friday whose genuine heft is likely to be felt in the global economy for years to come.

Whether the new frameworks of oversight, regulation, decision-making and accountability envisaged finally get implemented or not, this much is clear: the world’s leading economies appear to recognise that any reversion to the ‘business as usual, banking as usual’ model of global capitalism which existed prior to last year’s financial meltdown will only perpetuate the current crisis and help trigger fresh instability in the international system.

French President Nicolas Sarkozy described the agreement as a “revolution.” Speaking to reporters at the end of the G20 summit, Prime Minister Manmohan Singh was more guarded. But he highlighted several key issues on which, he said, genuine forward movement had taken place.

Of these, he said, the most important was the designation of the G20 as the “premier forum” for future discussion of international economic issues. “This is an important development broadening the international governance structure,” he said. The change will kick in immediately.

Next year’s G20 summit will take place in Canada, alongside the summit of the G8 whose deliberations will, presumably, be confined to non-economic matters and be far less crucial than the larger, more representative forum.

In line with this diffusion of power, the G20 also agreed to effect a 5 per cent shift in the IMF quota share — used to allocate voting rights — from over-represented countries to dynamic emerging markets and developing countries which are currently under-represented, by early 2011. Dr. Singh told reporters India had wanted more. “As of now, the developing countries quota is about 43 per cent. The four BRIC countries had suggested a rebalancing to the extent of 7 per cent, in which case the developing countries would have more than 50 per cent or nearly that.” But this was not acceptable to the West, which today has a majority quota share.

A further levelling of existing power relations could potentially be ushered in by the G20 decision to set up a mechanism for peer review of each other’s policy frameworks and performance. Much will depend on how the IMF implements its mandate to analyse “in a candid, even-handed and balanced” manner whether policies pursued by individual G20 countries “are collectively consistent with more sustainable and balanced trajectories for the global economy.” But this process will allow for the macroprudential and regulatory policies in the rich countries — which failed to prevent, and even encouraged, the rise of destabilising credit and asset price bubbles — to be the target for international scrutiny in much the same way that developing country fiscal, monetary, trade and structural policies have been for decades. This was a positive development, Prime Minister Singh told reporters, rejecting the suggestion that the autonomy of policymaking in India would be affected. “As far as our domestic policy is concerned, the IMF already reviews it … so I don’t see what more can be done as far as Indian policy is concerned. But the policies of major developed countries within the framework of review by the G20 will give us an opportunity to pick holes in the functioning of their economies.”