"Rate hikes and soaring inflation has pushed the U.S. Federal Reserve to hike rates at a pace last seen four decades back. Global central bankers are following suit. With the RBI set to deliver yet another hike at its August meet and global economy monitors such as the IMF downgrading growth warning of a global recession, we explore which is the lesser evil, higher rates or a global recession. 

Host Anupriya Bahadur is joined by Sugata Ghosh, Associate Editor, The Economic Times and Abheek Barua, Chief Economist, HDFC Bank to discuss the global economic drama and what could be the climax. Credits: Reserve Bank of India, Bloomberg Markets and Finance, CNBC US and Money Control"

This is an audio transcript of The Morning Brief podcast episode: Fire or Frying Pan: High Rates or Global Recession?

BG Sound

This is the morning brief from the economic times.


We expect inflation to remain undesirably high for some time, the current picture is plain to see, the labor market is extremely tight, and inflation is much too high.


That is the collateral risk that inflation remains elevated at these levels for too long.


Anupriya Bahadur

It's a sold out show featuring global economic drama, central bankers are stripping a common story against a common villain inflation. And on the other side, peeking in from the wings and ready to make a possible grand entrance is the risk of recession?


BG Sound

I don't I do not think the US is currently in a recession. And the reason is there just too many areas of the economy that are that are performing. You know, too well. And of course, I would point to the labor market in particular.


Anupriya Bahadur

If you can't avoid it, deny it. That's the mantra that seems to be coming from the Federal Reserve, as chief Powell holds on to the stance that the US is not in a recession, even though the data is signaling that the world's largest economy is in a technical textbook recession. But it's not just the US. There is a cost of living crisis across the Atlantic. Central bankers have little ammunition left, except continuing the bazooka bets of unprecedented rate hikes. No doubt it's time to buckle up and gear up for much higher rates and much slower growth. It's August 2, you're tuned into the morning brief by the economic times. I Anupriya and we seek an answer to the basic question. Fire of frying pan, high rates of global recession. What would you rather face economic times Sugata Ghosh and Abheek Barua The chief economist from HDFC Bank join in on this episode. Thank you so much, Sugata and Abheek for joining us and taking us through what are the twists and tails of this of this economic drama. We're down 225 basis points by the Fed in just a matter of few months. This is hardly seeming careful and hardly crafted. And history has shown us that you know we've never seen a soft landing. So what is different this time? And what is giving market the comfort that there is not just a third around the corner? I'll be why don't we start with you.


Abheek Barua

I think this is just a temporary reaction to what the Fed said in the last policy announcement which was on Wednesday. It didn't wait the market was kind of prepared for 100 basis point or one percentage point rate hike, the Fed did the 75 basis point hike as was the dominant expectation in the market. So the worst case was kind of temporarily averted. And the market tends to often over parse the Feds communication and look for signs of thing that better than the understatement of the press conference. And it seemed a little less hawkish than could have been given the inflection situation. So I think this is a temporary could be a temporary action could be sort of a slightly more medium term reaction to the prospect of the Fed, not getting its biggest bazooka out and doing sort of 100 basis point high this time and another 100. Again, the fact that the Fed clearly has its eye on the recession, ball, although didn't sort of use the word but it's hoping for a soft landing, but that's for all central banks say, but clearly from the tone and tenor of the communication, one could perhaps gauge that there is some concern which is possibly going to grow about recession. And it's not just all about inflation, inflation, inflation.


Anupriya Bahadur

And we'll come back to what that translates for the market which is which is better or which is worth what is the market really prefer at this time. But what is making the market so confident in your opinion that there could be a soft landing?


Sugata Ghosh

Look,I just step back for a moment. If you see we are grappling with a strange commentary. On one hand, there is this chatter of job growth. The job numbers are good. On the other hand, there are whispers of recession, which is getting louder by the day. So its job growth amid fears of recession, if I may be a little flippant is just the reverse of jobless growth. So something we have not experienced before. So despite this looming specter of recession, the Fed is raising rates because the labor market numbers are good. And the labor market is not responding to rate hikes. But at the same time, when you declare a recession, it is just not two quarters of next TIF growth, that the National Bureau declares a session looking at a range of factors. So the retail sales are soft, the housings are there. So housing numbers are there. So an unemployment is one factor. But so far, we are not seeing correction in the labor numbers, which is still very strong. And for the last many decades, decades, recession, or even the march towards it has gone hand in hand with rising unemployment. This isn't the case now. So that makes things even more complicated. And so the Fed has to choose whether it can engineer a soft landing, or it has to go on raising interest rates to kill inflation. So it's very difficult to pre commit for any central bank and all central banks, including ours will be looking at fed and waiting for information, more information flow. Before we take the call.


Anupriya Bahadur

You know, I want to go back to the market confidence point that we're making the US markets have dropped in about 9% growth in July. I mean, it's been the best in two years for a single month. similar fate on the last few days. Well, with the nifty up now, what about eight and a half percent in July. But inflation is seeming sticky, again, is markets bringing back the phrase that bad news is good news and hoping for what is you know, traditionally call the Goldilocks scenario, that growth will slow down and central bankers will have to take the foot off the pedal of it.


Abheek Barua

I started by talking about the markets confidence, this could just be a temporary phenomenon. Till the next set of numbers come out, I think the next set of market moving numbers would be the so called the non farm payrolls or the effectively the employment rates in the US which are due I think, this week. So I don't think that we should get too carried away by the markets. This could just be one of those periods in which you are in a very, very difficult situation, call it a bear market or whatever. I think it was, I would see the market's current euphoria, or confidence if you like. Abortion is a response to what didn't happen. And the prospect of the Fed kind of thickness softer stance that the extreme stance, that was the partly anticipated, but I would caution against sort of getting get too carried away by this, the next set of numbers could again change the story altogether, we are in a very, very volatile, very skittish kind of environment.


Anupriya Bahadur

And you know, to the common of this, because the other thing that is not so talked about is also the shrinking of the balance sheet, we started to wean off the baby of free money now, the rate of pace of rate hikes may ease out. But there is a significant reduction or the slowdown of the Fed balance sheet that comes into play from September as well is that something that we will have to take an account for


Sugata Ghosh

That is something the entire world has to take into account as the Fed shrinks the balance sheet, markets will react across the globe, particularly emerging markets. So that is unavoidable. And that, but the thing here is that more and more as the inflation chatter grows louder, the bet that the market is taking and it could well be a very temporary betters of Excel, is that maybe bet would be slightly less hawkish than what what it was what many people felt it would be six months back. So that is a temporary rally, but then they will wait for more numbers to come.


Anupriya Bahadur

Before we should focus on to Main Street and Governor Das. I want to show how the commentary has changed not just the Fed, but across the world as well. This is Governor Das before the Ukraine war happened.


BG Sound

Based on an assessment of the evolving macroeconomic and financial conditions and the outlook. The MPC voted unanimously to maintain status quo with regard to the policy report it and by a majority of five to one to retain the accommodative policy stance.


Anupriya Bahadur

The key word being accommodative there and that got dropped like a hot potato come May and the Fed rate hike


BG Sound

confronted by elevated inflationary pressures that have shifted the future trajectory of inflation upwards, we have announced our intention to engage in withdrawal of accommodation to ensure that inflation remains aligned to the target.


Anupriya Bahadur

So we that's been the change of tone and tenure at the RBI is in a hot place. Now, where do you think between the crosscurrents So where will governor Das settle 25 to 50 basis points? Where is your paycheck?


Abheek Barua

i It doesn't really matter because he could might might as well do a 50. Because we kind of know from the existing literature that the impact of interest rates are felt with reasonable lag. So there is this business of front loading. So, in responding to local inflation, I think there is some more need or space to hike rates, and the quicker it has done, the better. But I must emphasize that we are in a situation in both in terms of inflation and some of our other macro balances where we are much better off than some of the developed markets, one of the reasons being that we didn't sort of binge on the fiscal side during the pandemic. So we don't have huge debt problem, the sort of incremental debt problem that some of the developed markets had. So I think government does might want to focus on taking to a path that addresses domestic inflation, which is they're alive and kicking, but it's not as bad as the situation in the US. And I think he might want to take the policy rate the repo rate up to around 6%. And faster, he doesn't, the better. The other issue, which comes up in central bank policy, or the RBS move is whether the interest rate should be used as a currency defense, because just a couple of weeks back, you saw the rubies are briefly crossed at and Hispanic all round. And he calls for the RBI to take note of that in its actions going forward. I think in this kind of situation where there is enormous risk aversion, a huge preference for the dollar interest rate, the classic interest rate defense where I hike my rates as much or if not more than what the Fed is doing is unlikely to work. There is a recent example of the Reserve Bank of New Zealand which tried this to keep the New Zealand currency and check it didn't work. So I think if you sort of take away the interest rate, defense and local inflation conditions, which I hope to Governor goes by, and his emphasis on kind of supporting growth, I think a 50 basis point hike with a terminal rate, as I said, of 60 cent is I think, what the doctor ordered


Anupriya Bahadur

Sugata is that the right prescription, do you think that the market and the economy is looking for?


Sugata Ghosh

No, I largely agree with the public. Only thing is that given a choice, I mean, if they find that little space to convince them selves, I will not be surprised if Governor has and his advisors stick with a 35 beeps hike. So in private conversations, or the senior officials often say I mean, maybe on a lighter vein, the end of the war, which will bring down inflation and not monetary policy. Indeed, that was one of the takeaways of RBIs offside with the analyst last month in Lonavala. But then saying something in the course of an informal of the record conversation over a glass of wine is different from the formal position a central bank takes, but the other the other. So a 50 is more likely, I would say 60% chance 70% Chance, but I will not be entirely surprised if he sticks to credit by on the other hand is the currency thing. I have not heard RBI governor in the past, use the term zero tolerance for volatility in the currency market. I think those are very strong words. And there was some bit of longer liquidation that happened. And it left people wondering that how strong would be the degree of intervention and how far it makes sense in the sense of in the face of a strengthening dollar. So inflation is one thing but RBI, I think is equally worried, even though it doesn't come out so often, but it's it's equally worried, if not more on the currency front.


Anupriya Bahadur

And there has been significant intervention. Obviously, it's not given out as, as detail detailed data, but there has been considerable intervention. They've tried to keep it on the 600 mark for the Forex reserves. But robic what does this mean for corporate India? I mean, our exposures in dollar terms are much less are not as volatile as they used to be. What is worse or preferable, lesser dollars in the world of higher financing costs or slow growth? How would they seem to balance the next year out?


Abheek Barua

Once I think there are a number of issues one of course was the access to cheap capital as the Fed trims its balance sheet along with the other central banks, there would be less money available to borrow so the borrowing costs will go up. So the place to look for money is within the economy and within the domestic economy. I think there would be a shift away from the external commercial borrowings, etc, to more local products, perhaps our focus is getting reflected in our credit expansion numbers. The other thing is costs. One of the good things about recession for for a corporate sector or a country that is largely a net commodity importers that with recession risks, you have a decline in commodity prices, which has happened for metals, it's happening for semiconductors, and so forth. And don't forget the fact that there's a parallel story playing out that of China really struggling with growth, and that, again, sort of China's a big guzzler of these things. So China is kind of is slow, a perhaps even slower, slowing further. So that's some bit of good news on that front. So that's kind of earnings positive, but again, to domestic will come at a higher rate. So that's something that they need to be prepared for. And then there is the sort of business about currency hedging. So when do you, for an exporter? For instance, reputation, deposition is good. So I mean, he would want to keep some open positions, before anyone who's bringing in donors, I think risk management becomes very, very critical. And how much to hedge, whether it's a hedge or all positions over there to keep some of it open, etcetera, is a very difficult choice that CFOs have to make. And this doesn't come for free. So you have the hedging has its own costs, and the costs tend to increase as volatility goes up. So there's a whole bunch of very difficult challenges for


Sugata Ghosh

Justifying may intervene. I mean, how, how worried are you about the fiscal deficit with rates going up? If there is a slowdown, there could be a dip in tax collections, and all that the face of the twin deficit and slower inflows?


Abheek Barua

Yes, I mean, I think there is a there are macro challenges. But I given even if there is a slowdown, the slowdown would largely come from the export side along with some softness of consumption because of the local rate hikes. And we do have a large current account deficit, I think we are sort of at the edge of the envelope, but we are not in we are not close to panic zone, because we we have buffers, we have adequate reserves, unlike saying in 2013, the fiscal situation, if you sort of account for converted so forth, is has been brought under control, and we didn't go on a fiscal binge. So I think in relative terms, we are kind of certainly in a very, very difficult situation. But if you compare it with other episodes, whether he's been under pressure or the result of concerns about macro balances, I would say it's somewhat less than the previous episodes. And we can kind of we are not in a situation where there's a possibility of implosion, or medium crisis.


Anupriya Bahadur

So before we wrap this out, I want to share with ask you first, and then I'll pick what would be the, like the top three things that you're watching out over the next quarter.


Sugata Ghosh

The first thing is the unemployment numbers of in the US, and also greater clarity on this labor data, because in the US, there is a question mark also on the nature of the labor data, because some people are saying that last section of the population went out of the labor market with COVID. And they never came back and US migration policies tighter. So what you are seeing as a strong labor data, maybe a little bit of optics in it, and the secondly is the inflation in India, that is very important. And thirdly, whether Europe, whether the recession comes in Europe before the US because even if the even if there is even if there is recession in us, whoever is forecasting, it would not be before middle of 2023. So all commentaries on recession, look at the tracking the labor data, and inpatient at home


Anupriya Bahadur

or be chaotic.


Abheek Barua

Yeah, I would broadly agree with showboater I think he's covered all bases that I would just keep an eye out on domestic earnings to figure out how bad the impact of the global recession is. I'd also like to see where whether the dollar is showing signs of stability and then decline because that would be a game changer. Because the dollar I think is over bought. And I mean, I think and of course the global macroeconomic situation as a whole and and whether there is I would tend to sort of look at the natural gas markets and what happens to Europe once they stop sourcing from Russia I think that's one risk be cannot overlook.


Anupriya Bahadur

So those are the top things to look out for in the year ahead and they're not going to be pretty thank you a week and regatta for joining in and the verdict is in. It's definitely not an all clear for the markets or the economy. The world economy faces one of the weakest years since 1970, a period of intense stagflation across the globe. But wait, that may not be bad news, as markets will continue to bet that bankers will soon walk the walk of shame and retreat rates may be just as fast as they are raising them now. Will that mean that the fight against inflation failed? Or will central bankers need to get innovative once again, as they say, picture I'll be back here. So grab your popcorn, but it could be a tale with many twists and turns. But for now the spotlight firmly your governor Das as he takes the podium on August 5, and the markets bet on yet another big hi from Main Street. I'm Anupriya and you've been listening to fire a frying pan high rates of global recession on the morning brief podcast. This episode was produced by Surbhi Modi in Summit Pande from the economic times along with Swati Joshi from Aawaz sound credit Rajas Naik from economic times and Saundraya Jayachandran from Aawaz executive producers Arijit Barman from the economic times. We hope you enjoyed listening to the episode do share the episode on your social media networks. The morning brief airs Tuesday Thursday and Friday and do tune into et play a latest platform for all audio content, including the morning brief. All external sound tips uses episode belong to the respective owners and credits can be found in the description. Thank you for listening and have a nice day and a great week ahead.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: themorningbrief@timesgroup.com We will do our best to make the amendment as soon as possible.
 



 


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