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16
December 2016
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Dollars(The Total Investment & Insurance
Solutions)
The US Federal Open Market Committee (FOMC)
finally decided to raise the target range for the federal funds rate by 0.25%
point. This is the first rate hike by the Fed in 2016 and just the second in a
decade. It appears that Federal Reserve’s decision is now balancing both
credibility factor and data driven fixation in deciding its policy and even if
the economy has shown some uptick, the Federal Reserve’s action is in stark
departure from rhetoric of a fiscal stimulus, says a research note. The Total Investment & Insurance
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In the report, State Bank of India (SBI),
talking about the impact of US Fed policy in India says, "We believe the
impact will be muted though the currency can take a short term hit.
Interestingly, there could be a commonality as far as fiscal stimulus is
concerned between US and India. India could take perhaps take the route of pump
priming the economy post demonetisation, but that may be through tax cuts as it
may boost consumption, that have taken a hit in the last two months." The Total Investment & Insurance
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The SBI Ecowrap report says, "In 2017,
apart from Fed rate hikes, there is now almost a universal consensus of a
fiscal stimulus by the new US Government dispensation. There are two ways to
look into such. Firstly, fiscal stimulus through tax cuts. Secondly, fiscal
stimulus by ramp up of infrastructure spend. We envisage that a fiscal stimulus
through tax cuts may not be that productive as it may benefit more the rich and
thereby lead to rise in conspicuous consumption. Instead, the infrastructure
spend will benefit more in terms of job creation. An increase in infrastructure
spending looks all the more beneficial given that the American Society of Civil
Engineers estimate a total investment of $3.6 trillion by 2020 to upgrade or
improve various infrastructures. The
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"However, on the flip side, the US
public pension system has developed a $3.4 trillion funding hole that is
putting pressure on cities and states to cut spending or raise taxes. Large
pension shortfalls have already played a role in driving several US cities,
including Detroit in Michigan and San Bernardino in California, to file for
Chapter 11 bankruptcy. The fear is other cities will soon become insolvent due
to the size of their pension deficits. In December, the Dallas Pension System
has suspended withdrawals. Hence when viewed at lowest level of Federal
structure, the economic picture can be different." The Total Investment & Insurance Solutions
"Another aspect of Federal Reserve’s
valuation is that it is masked by linear, homogeneous narrative on inflation
and unemployment rate. Its decision never acknowledges the falling labour force
participation rate which is one of the factors why unemployment rate has
fallen," SBI said in the report.The
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