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Is This What Fed Chief Meant By Policy Transmission…?: MD JM Financial


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Global financial markets have taken a hit from aggressive US policy stance

Global financial markets have gone through wild gyrations from the escalating Russia-Ukraine war, which has distorted world supply chains, which were already reeling from the pandemic-led disruptions.

That has resulted in an inflation surge. The response of an aggressive policy tightening outlook from the US Fed has rattled investors the world over and has accentuated stagflation risks.

Higher interest rates to combat surging inflation lead to a slowdown in demand and economic activity and growth.

Fed officials have openly spoken of larger and more significant rate hikes to fight runaway inflation, with a 50 basis points (bps) hike in May, a given, with one policymaker even suggesting a 75 bps rate hike.

Is the hit to financial markets, what the US Federal Reserve chief, Jerome Powell meant by the transmission of monetary tightening to control the surging inflation, asked Dhananjay Sinha, MD and chief strategist JM Finance Institutional Equity, in a LinkedIn post – referring to the aggressive US monetary policy stance.

“US stocks have plummeted lower than the Ukraine-Russia war lows, the dollar index -DXY, is at a 22 year high while treasury yields have risen sharply. And we still have the Fed’s tightening to roll out. US real GDP contracted 1.4% in 1Q, and China manufacturing PMI also dipped sharply, ” the LinkedIn post read.

“Is this what Powell meant by transmitting monetary tightening to control the 40-year high inflation through financial asset price correction? If the answer is indeed yes, then we are in for a period of heightened volatility. EUR-USD can breach parity, and DXY can go much higher. Watchful on industrial and Agri commodities now,” he added.



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