Bernanke clarification puts markets at ease
Even at the time the markets were in their manic phase after the last Fed meeting, it always looked like they were reading the Fed wrong. After all, granted the US was recovering, there was nothing in the numbers to suggest the bond purchases would be wound down over the next 6-8 months. When QE3 began, the Fed had put in a very explicit 6.5% US unemployment number as the trigger for easing up on the bond purchases. While US payroll data has looked better each month, the unemployment rates also went up at the same time. As the jobs market looked better, those who had opted out of it after several months of not finding a job decided to get back on the market—since the number rejoining the labour market was greater, unemployment rates have risen in the US. What is curious about the market behaviour is that much of this has been known for a long time. Even a month ago, when S&P upgraded its outlook for the US, it said it didn’t expect interest rates to start going up till early 2015 which is when it expected US unemployment to fall below 6.5%. When the jobs data came out last month and the quality of jobs was seen as significantly poorer than in the past, the point about the weakness in the consumer recovery was underscored. Some days later, the IMF consultations with the US resulted in the agency projecting a 7.2% unemployment rate in 2014. The slower US recovery, to just 1.8% in Q1—according to data out three weeks ago—also makes the same point about how the road ahead is a long one. Whether the US reaches an agreement or not on the sequester, the amount that government spending needs to be squeezed by—even though some part of it will get taken care of as GDP rises—required over the decade is significant. Which is why, Fed Chairman Ben Bernanke was a bit more specific when he spoke last week of how policy was going to remain accommodative for a while.
It is, of course, possible the US will recover faster, but either way the impact on India is going to be mixed. A delayed US recovery may give it greater access to FII flows looking for higher yields, but that will slow the export recovery. Also, continuation of QE3 will result in higher commodity prices, something we’re beginning to see a little bit of over the past few days. All of which means that India just has to get its act together to attract FDI and to start finding ways to reduce its dependence on imported energy. Later today, the IMG on coal PPP has its second meeting in 5 months, so we’ll get a sense of the government’s plans on the latter.