The Fed gives a rate hike warning to central banks and global markets

The first test for the new RBI Governor Urjit Patel is on the card. US Fed’ Chairperson Janet Yellen indicated that the Fed is thinking about the rate hike when its Federal Open Market Committee meets next month.

The Federal Reserve was long waiting to continue its quantitative easing exit policy by raising its rate (like the repo rate) from it historical low of zero to the normal level. Last December the Fed raised its policy rate to 0.5%.

Improvement in the macro economy anchored by increased employment is the criteria for raising the Fed rate.

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Ms Yellen told central bankers on Friday.

If the Fed takes a rate hike decision, its direct and immediate impact will be on the global financial markets. The most affected will be the emerging markets. Any increase in Fed rate signals an increased US interest rate and the country’s financial instruments may become more attractive and this may trigger a capital outflow event from the emerging markets.

The rate hike announcement is thus becoming a responsible warning by the Fed to other central bankers. Though the Fed’s Federal Open Market Committee is meeting between September 20-21, the rate hike decision may be made only later as the world markets get prepared.