The Federal Open Market Committee (FOMC) in its meeting on June 14, opted to hold interest rates steady at 5-5.25%, after a marathon of 10 continuous rate hikes since March 2022. While the decision aligned with market expectations, it carried a surprising twist as it indicated that two more rate hikes are likely given the hawkish projections for the economy.
Despite reaching a general consensus, committee members held different opinions regarding future rate hikes. Two members believed that there would be no rate hikes this year, while four members anticipated a single hike. Nine members expect two additional rate hikes, and two members even raised the possibility of a third hike. In fact, one member predicted four more hikes, each with a quarter-point increase.
Notably, the committee members adjusted their forecasts for the fed funds rate. Their latest projections indicate a rate of 4.6% in 2024 and 3.4% in 2025, which is higher than the previous forecasts of 4.3% and 3.1% in the March Summary of Economic Projections.
The Market Response
- After the Fed statement, the Dow Jones Industrial Average saw deep losses initially. However, it managed to recoup some of those losses towards the end of the trading session.
- MSCI's gauge of global stocks also shed some gains after rising earlier in the session.
- The US dollar index fell, while the euro and Japanese yen strengthened against the greenback.
- Crude oil futures added to their losses, and bond yields immediately rose following the indication of future rate hikes - the 10-year yield rose to 3.82% from 3.77%.
Charting the ‘Hawkish’ Pause
The decision by the FOMC to pause rate hikes was widely expected. However, it doesn't mean that the Federal Reserve has become any less hawkish. In fact, there are signals that they're still not convinced that inflation has moderated to a satisfactory level. The implication? There might be more rate hikes in the pipeline before the Fed decides to pivot.
Retail inflation is down from its 9.2% peak last year to 4% in May, a considerable decrease from 4.9% in April. However, the Fed is keeping an eye on the numbers because it is still quite a distance from the targeted inflation rate of 2%. Also, the core inflation continues to run high, topping 5%.
Impact on India
The Indian stock market also moved in sync with the global trends and was volatile in early trade the following day, swinging between gains and losses before erasing all gains and ending at the day’s low. While the Federal Reserve's hawkish stance could potentially lead to short-term volatility in the equity markets, our outlook remains positive for the Indian stock market as a whole.
India is in a sweet spot within the Emerging Markets (EM) sector. The Indian economy has surpassed expectations, demonstrating sustained progress and a decreasing trend in inflation. This stands in stark contrast to the disappointing figures emerging from China. Viewed globally, India finds itself in a favourable position and that will continue to draw substantial foreign investments. Therefore, for long-term investors, a staggered buying strategy towards sectors such as automotive, capital goods, and those associated with construction could be a promising approach.
In the near term, the Indian markets are likely to take cues from the potential impact of El-Nino events or monsoon progression, the movement of crude oil prices, and monetary policy announcements from the Reserve Bank of India.
Projections & Outlook
According to the Fed Chair, the case for future rate hikes is underpinned by projections of higher growth in the US, lower unemployment, and a tight labour market that maintains elevated wage costs. Although the markets are now factoring in a 70% chance of another rate hike in the July FOMC meet, a cut in rates looks unlikely until January 2024. As a result, there will likely be volatility in risk assets and risk aversion will keep Gold relevant as a portfolio diversifier for some more time.
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