Hawkish pause – The Core IAS

Hawkish pause

  • A hawkish pause then implies that while the central bank has decided to pause raising interest rates — as both the RBI and the US Fed have done, ending a streak of repeated interest rate hikes — no one should mistake this for them taking their eye off the target (of bringing inflation to its target level, which is 4% for India and 2% for the US). 
  • If you wonder who these people are who care about this nuanced position, think of everyone who invests (a form of lending) in stocks and bonds and also includes everyone who borrows money (including the Union government). Having an accurate understanding of where the interest rates are headed can make or break a business or investment. Low interest rates, for instance, imply that stock markets will move higher because fresh credit is cheaper than previously imagined.
  • For one, the central bank chiefs make statements that leave little doubt. For instance, while announcing a pause on hiking interest rates in April, RBI Governor Shaktikanta Das said: “Let me emphasise that the decision to pause on the repo rate is for this meeting only.” In other words, market observers should not believe that the days of hiking interest rates are over. He kept the option of restarting interest rate hikes in June. He made it clear that a pause in April is not a pivot, or a point after which interest rates will only go down, not up.
  • While announcing its decision to pause, US Fed Chair Jay Powell said the exact same thing. That this pause applies to only the June meeting of the Fed and that the July meeting is still “live” (meaning it can witness a hike).
  • In fact, before the latest Fed meeting on Wednesday, everyone pencilled in one more interest rate hike in 2023, but after the meeting Powell made it clear that there is a good possibility that two more rate hikes might happen.
  • These are the things that make a pause “hawkish”. Essentially, no one should take it for granted that the Fed (or the RBI) have stopped taking the threat of inflation lightly.