US Federal Reserve's Latest Policy Meet Outcome: How Will It Impact The Stock Market?

Federal Reserve holds interest rates at 5.25-5.50%. Analyse 2024's potential rate cuts impact on stock markets

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In a widely anticipated move, the Federal Reserve maintained its benchmark interest rates at 5.25 - 5.50% for the fifth consecutive meeting. This decision came after a two-day Federal Open Market Committee (FOMC) meeting, aligning with Street predictions. Despite the constant rates, the FOMC signalled potential rate cuts in 2024, expecting to reduce rates by three increments despite persistent inflation concerns.

Interest Rate Projections and Economic Forecasts

The unanimous decision by the FOMC to maintain the current policy rate highlights a deliberate strategy to balance inflation control with economic expansion. The FOMC members have also kept the median interest rate forecast for the end of 2024 in the range of 4.50 to 4.75, indicating an anticipation of 0.75 percentage points in reductions by year-end. This is expected to translate into three separate cuts of 0.25 percentage points each.

Furthermore, Federal Reserve officials have upgraded their forecast for US economic growth in 2024 to 2.1%, up from 1.4%, demonstrating confidence in the economy's enduring strength. Despite this positive adjustment, the inflation projection remains unchanged, with a minor uptick in the forecast for "core" inflation, which excludes the prices of energy and food.

Stock Market Response: A Relief Rally

The US equity markets responded positively to the Federal Reserve's announcement, with the S&P 500 index soaring 10% above its level following the December 2023 meeting. Global markets also reacted favourably, buoyed by Fed Chair Jerome Powell's assurance that robust US economic growth and a strong labour market would not hinder planned rate cuts in 2024. This reassurance has bolstered investor confidence, leading to a bullish sentiment across global equity markets.

The sentiment among investors was further fuelled by the results of the Bank of America Fund Manager Survey. The survey suggested that, although inflation remains a significant concern for the equity market, the overall mood is decidedly “bullish”. It revealed that 23% of fund managers have dismissed the possibility of a recession, suggesting the global economy might not experience a downturn at all. This represents a significant shift from January 2024, when only 7% of fund managers were in agreement with this outlook. This positive change in perspective is supported by recent upgrades in global growth forecasts by major institutions such as the IMF and the World Bank.

Implications for India and Emerging Markets

On March 21, the Indian markets also bounced back from their recent slump, closing strongly higher as investors welcomed the Federal Reserve's less aggressive monetary outlook and the anticipation of three interest rate cuts starting June. This uplift was mirrored across all sectoral indices, demonstrating widespread investor optimism. 

Ending the day, the Sensex was up by 539.50 points or 0.75% at 72,641, and the Nifty increased by 172.85 points or 0.79% to 22,012. The momentum extended to the broader market as well, with both the BSE Midcap and Small-cap indices climbing nearly 2%. In fact, companies listed on the Bombay Stock Exchange (BSE) saw an increase in market capitalization of Rs 5 lakh crore on Thursday alone. 

Nifty 1-Day Price Chart
Nifty 1-Day Price Chart

Although short-term volatility cannot be ruled out considering the longer-than-anticipated timeline in the US policy easing cycle, however, the positive revision in US growth forecasts bodes well for Indian exporters catering to discretionary demand in these markets. Additionally, the India Flash Purchasing Managers Index for March 2024 indicates robust expansion in both the manufacturing and services sectors, highlighted by rising sales, higher new orders, improved exports, and increased employment. 

Moreover, recent figures from China, with retail sales at 5.5% and industrial production at 7%, suggest a resurgence in domestic demand. Although it is too soon to make definitive statements about China's economic recovery, the end of deflation in the country could significantly enhance global economic growth and mitigate trade imbalances.

Investment Strategies and Market Outlook

In India, the current environment of regulatory oversight and reduced liquidity is fostering a cautious approach among investors, leading to a decline in stock prices as the cost and access to capital become more challenging. This effect is particularly pronounced among smaller companies, though the repercussions are felt across various market segments in the short term. However, history has shown that high-quality stocks with solid earnings potential tend to recover more swiftly.

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Despite these challenges, the long-term growth potential of companies and the economy remains intact, suggesting that the current market adjustments are temporary. Investors are encouraged to view this period as an opportunity to invest in quality stocks that are poised for recovery and growth. As India undergoes structural reforms and enhances its global market integration, investors are presented with a prime opportunity to adjust their portfolios and leverage the ongoing market fluctuations for long-term benefits.

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