The third wave of the pandemic is sweeping the US and Europe, and most other parts of the world including China and India. But it is not expected to cause any major disruptions to economic life and activity as the level of infection is reported to be milder, requiring no hospitalization in most cases. But this definitely makes policy decisions difficult at a time when the post-pandemic world was resurrecting itself from the remnants of the vast damages over the two -year period. The US policy is going to be tighter from hereon. The Fed Chair Powell said that the US economy is “both healthy enough and in need of tighter monetary policy.” This, in essence, means, tapering of the bond purchases faster, and interest rate hikes. The discussion is no longer on hike or no-hike, but on the number of hikes. The larger number of voices present a case for three to four hikes during the course of this year. The Fed faced some criticism for considering inflation as transient, and finally, inflation became persistent. This probably delayed a Fed response to inflation well on time. The December consumer price index showed inflation at 7 %, which is considered too hot for the economy to handle unless appropriate policy measures are initiated without delay. The US ten- year yield which was perched around 1.45 % to 1.50 % levels has already surged to 1.80 %, a precursor to a further uptick as the calls for rate action becomes louder still on the street.
Over the next two quarters the benchmark yield is likely to move up to 2.00 % to 2.25 %. While growth has been subdued in China, due to the shutdown in several provinces, and also due to the relatively tighter monetary policy followed by the PBOC soon after the first phase of the pandemic, China has cut the cost of money for the one-year time horizon in an effort to cheapen funds for short to medium term use. The real estate related issues are not yet over, and it may linger on as many firms in the sector are facing issues similar to what Evergrande has been confronted with. A US Congressional report in this connection highlights these issues and concludes that unless resolved faster some of these issues may adversely affect the global economy too. The Chinese government is likely to initiate certain steps to provide funding to some of the larger firms which are currently facing stress. The expected rate of economic growth for China is placed at 5% to 5.50% by majority of the analyst firms. This presupposes a revival from the current downturn which we have witnessed in the last few quarters. Europe still remains in the pandemic control mode with no change in the money policy. The spread of the new variant of the pandemic has also slowed down the need to move into normalization at a swift pace. Only the UK has lifted the base rate three weeks back in its efforts to contain an unruly price situation. For the rest of Europe, it is still not time for action on the price front. Despite the third wave it is more or less business as usual in many of the global economies, which in a way safeguards output and employment, unlike it was in the first wave of disaster and disruptions. A relatively higher inflation and tighter policy prescriptions may dominate the scene at least in the first half of 2022, beyond which, price pressures may start waning.
