The US Federal Reserve just released the minutes of its April joint meeting with the FOMC (Federal Open Market Committee), in which one sentence talks about reducing the pace of monthly asset purchases (up to $120 billion) that the Fed has been making since the Covid crisis began. The Fed’s asset purchases are used to ease liquidity conditions and boost the economy.
“A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”
This statement refers to the fairly advanced stage of vaccinations in the US and the ongoing recovery of the American economy.
But in India and parts of the rest of Asia, the virus is still raging, with vaccination levels lower than the West. In Maharashtra, we are in near-total lockdown. The Indian economy is still reeling from Covid’s second-wave body blow and is nowhere near “rapid progress”.
Since money flows across borders, if the US does begin tightening liquidity in the next year, before the developing world recovers, it may be a compounding negative effect for countries like India that are scarce on capital even in good years.