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Raghuram Rajan has been constantly urging major central banks, particularly the US Federal Reserve, to keep in mind the spillover effects of their ultra loose monetary policies on emerging economies such as India. This column agrees that in a highly integrated global economy, the zero interest rate policy (ZIRP) era and Quantitative Easing (QE) measures undertaken my major central banks have affected India to a great extent. For example, apart from geopolitical tensions, QE has been a major factor which has held crude prices so high after the financial crisis. Thus, to some extent, importing higher energy costs can be attributed to Indiaís inflation woes in recent years.
Governor Rajanís desire that emerging economies have a larger say in setting the global monetary policy agenda is an idea whose time has not come. The reason is simply that the US Federal Reserve does not have a preset path to normalising it's monetary policy over the medium term. Although, the Fed has been reducing it's monthly purchases of bonds and mortgage backed securities (MBS) by $10 billion each month, there is still a lot of speculation amongst market participants as to when the first rate hike would occur. Remember what the general consensus at the beginning of 2014 for US bond yields was? The prevailing view was that US ten year yields would be heading north of three percent at least. However, US bonds have not sold off as expected and ten year yields are stuck at below 2.4 percent. It is true that the crisis in Ukraine and the geopolitical tensions in the Middle East have led to the flow of funds into US bonds and the greenback ( both perceived as safe haven assets) in recent weeks. But what has really been at play is arguably the most dovish US Federal Reserve establishment. At each press conference and in the minutes of the Federal Open Market Committee (FOMC), Janet Yellen has categorically reiterated the fact that the US Fed would continue to remain accommodative until a sustainable recovery in the labour market is not seen. Note that nobody is talking about the "Evan's rule" now- which linked certain threshold levels that key macro variables ( inflation and unemployment rate) must reach and US monetary tightening. What US policy makers fail to understand is that the weakness in the jobs market is more to with structural rather than cyclical problems. One