Kevin Warsh-led Federal Reserve starts US war on inflation

US Fed chair Kevin Warsh led a unanimous 12-0 vote to raise interest rate to 3.75-4%, defying Donald Trump's calls for lower borrowing costs. This is the Fed's first interest rate hike in 3 yrs, as central bankers across the world get their act together over controlling inflation. The dollar is nestled higher, equities are shuffling after a dip, and short-term bond yields have jumped on expectation of another rate hike this year.

A hawkish Fed could be spoilsport for the AI party, as investors take stock of rich valuation. Inflation expectations are up across the board as energy prices and bond yields stay high. G7 central banks will take their cue from the Fed. This will be a second round of concerted interest rate hikes since the Ukraine conflict as stagflation rears its head. Most emerging economies will have to follow into an interest rate upcycle.

Read more: ‘Fed’ up with inflation? US rate hike leaves RBI with an October-or-December dilemma, economists say


India will feel the drag of higher global interest rates combined with trade friction and disrupted energy supplies. Effects on Indian equities could be mixed if AI valuations moderate, while its vulnerability to the US war on Iran remains elevated. The rupee will remain under pressure from a strengthening dollar. Global capital seeking safe harbour in US treasuries will affect India's equity and commodity markets. There is some cushion in domestic consumption. But that comes at the cost of fiscal slippage and RBI's tolerance for inflation resurging soon after a painful spike.

RBI has consistently opted for a low growth sacrifice while chasing inflation targets. The economy has shown remarkable resilience during the West Asia crisis. But persistent energy disruption will chip away at the momentum. Separately, food inflation is on an episodic climb, with second-order effects of energy inflation yet to work their way through the system. Timelines for interest rate changes may have to be foreshortened. This could throttle credit-led consumption and a revival of private investment. But, as the Fed has shown, it's better to strike first in the battle against inflation.