The Federal Reserve should avoid an excessively reactive monetary policy and allow its sharp rate hikes to take effect, according to a member of India’s rate-setting panel.
"It takes a few quarters for interest rate rises to take effect on demand and demand-led inflation and it is appropriate to watch for some time, allow these to take effect," Ashima Goyal, a member of the Reserve Bank's Monetary Policy Committee, said at an event on March 15.
“You cannot just keep raising rates until inflation starts falling. That is a recipe for over-reaction, overtightening and creating financial instability.”
The Federal Reserve has raised interest rates sharply over the last year as it sought to curb red-hot inflation. The markets had hoped that it would hit the brakes on rate hikes in 2023 but the recent robust economic data and remarks by Fed Chair Jerome Powell fuelled anticipation of further tightening.
Over the last weekend, the crisis at the Silicon Valley Bank and Signature Bank complicated the situation in the US, with many investors calling for a rate pause and some even hinting at a rate cut going ahead.
Goyal, one of the six members of the rate-setting panel, has also been advocating for a pause to rate hikes in India, where policy has been tightened significantly over the last year.
“I think there is an urgent need to reduce over-reaction because we have seen what happened to SVB,” Goyal said at the event. “Rates had to rise because they had been cut exceptionally low during the pandemic but when they reach a certain level, you have to go very slowly.”
While advanced economies like the US went in for large fiscal and monetary stimulus during the pandemic, India largely relied on monetary easing with targeted fiscal measures.
Goyal pointed out that US actions have spillover effects for the rest of the world and said that underutilisation of so-called macroprudential regulation by advanced economies leads to crisis like with Silicon Valley Bank.
On rate hikes, she said that the monetary authorities cannot “announce that we are going to keep them high for longer, we are going to keep them high independently of data, we are going to keep them high no matter what”.
“You cannot announce that inflation is going to be persistent when we know that it is driven by supply-side changes and geopolitical, etcetera makes the supply side very volatile. So, it is good to have a data-based and a moderate policy,” Goyal said.
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