Enjoy while it lasts. Who knows the future?

"Is the Fed behind the curve? Alternatively, has it done too little too late?" asked VA Nageswaran, in an article on monetary policy in the US. The Federal Reserve is usually late in raising rates, which causes a boom in asset prices, and when it starts raising rates "it overdoes it because it is already late in doing so", resulting in a bust. This can be seen in the dramatic highs and lows of the Federal Funds rate, rising to a high of 20% in 1980 and falling to a low of 0.25% in December 2016. These rates coincide with the boom/bust cycles in the US economy, showing the inability of the Fed in keeping the economy on an even keel through its monetary policy. When interest rates are too low assets prices rise to extremely high levels, as people invest on borrowed money expecting prices to keep on rising. "Where the Fed has always erred -- including in this cycle -- is in allowing asset prices to get way ahead of fundamentals." Headline inflation has risen to 2.1% from 0.2% in 2015. There is euphoria in India because retail inflation fell to 2.99% in April from 3.89% in March, the lowest in decades. However, core inflation, which excludes volatile food and fuel prices, was stubbornly at 4.9%. Inflation expectation, which is what people expect it to be, was 7.5% over 3 months and 8.8% over one year. This implies that people fear that food prices could rise if the monsoons are poor or patchy and fuel prices depend on whether wars in the Middle East stay confined or spread to involve the whole region. The Reserve Bank probably expect retail inflation to rise because it left interest rate at 6.25% but changed its stance from 'accommodative' to 'neutral', which means hardening in RBI lingo. Politicians love high inflation because it reduces government debt. The government expects to borrow Rs 3.5 trillion from the market this year, while gross borrowing, which includes repayment of previous loans, will be Rs 5.8 trillion. Borrowing to pay back previous borrowing would be silly unless the present rate of interest is lower than the previous one, which is why politicians are always pressuring the RBI to reduce rates. The RBI is trying to reduce money supply by selling bonds but is unable to do so because of the enormous liquidity in banks, due to demonetization. The stock market is beating records almost everyday. The RBI is unable to raise rates to cool markets because higher rates will make the rupee stronger. It is already overvalued by 7%. A bubble maybe building up but who cares. People are feeling rich. Enjoy while it lasts.