The US Fed had raised its policy rate by 525 basis points since March 2022 to the current 5.25 per cent-5.50 per cent range, despite persistent US inflation rate levels exceeding the central bank’s target range.
After the US Federal Reserve unanimously voted to hold its benchmark interest rates unchanged at 5.25- 5.50 per cent, continuing its July stance, economists said that the Fed has kept the door open for one more hike before the end of the year. “The FOMC meeting yesterday was picture-perfect, with the Federal Reserve keeping interest rates unchanged and leaving the door ajar for one more hike before the end of this year,” said Manish Chowdhury, Head of Research, StoxBox. The US Fed had raised its policy rate by 525 basis points since March 2022 to the current 5.25 per cent-5.50 per cent range, despite persistent US inflation rate levels exceeding the central bank’s target range while the US economy remains resilient.
“US Fed’s decision to defer rate hike, although expected, may keep global markets on tenterhooks. Inflation in the US is still high and other economic parameters are still showing little signs of slow down. US 10 year at 4.472 per cent and 2 year at 5.184 per cent does reflect the expectation that before year end further rate hikes may be expected,” said Naresh Tejwani, Strategic Advisor to Abans Group.
After the two-day meeting held on September 19 and 20, 12 of 19 policymakers on the FOMC expected one more rate hike this year to be appropriate with the remaining seven favouring holding rates steady. The policymakers’ inclination to keep rates high for an extended period suggests that they remain concerned that inflation might not be falling fast enough toward their 2 per cent target. The Summary Economic Projections (SEP) forecasts inflation to drop to 3.3 per cent by year-end.
Further, policymakers’ GDP growth projection in 2023 rose to 2.1 per cent from the 1 per cent growth projected in June.The unemployment rate, currently at 3.8 per cent, is seen peeking at 4.1 per cent in 2024 and remaining steady for 2025 in comparison to the 4.5 per cent mark seen in June. During his monetary policy speech, US Federal Reserve Chair Jerome Powell said that there is a ‘long way to go’ in bringing inflation sustainably down to policymakers’ 2 per cent target.
“The major policy is that the Fed indicated that interest rates will remain higher for longer than expected. Based on Fed’s guidance, the markets should not expect any rate cuts for the first half of the year while interest rates will remain much higher next year even as inflation keeps coming down. The Fed also doubled the GDP growth rate for this year as well as lowered the expected unemployment rate. This means that interest rates will remain higher for longer even if inflation comes down. This means that debt will remain most expensive for longer period of time,” said Rohit Arora, CEO and Co-founder, Biz2Credit and Biz2X.
Meanwhile, Manish Chowdhury from StoxBox, added, “With the call getting louder amongst Fed policymakers to keep rates steady going forward, our sense is that the Fed is in a conundrum over managing inflation in a rising energy environment without leaving a scar of recession on the world’s largest economy. The US economy has been defying most of the economic sense and the Fed also acknowledges the same, as reflected from their multi-dimensional approach (inflation, economic growth, labour market, etc.) than the one-dimensional approach (targeting just inflation) followed a year earlier. With some recent economic indicators showing a lag effect of the previous rate hikes, we would closely watch the triggers that may prompt the Fed Chairman to take a further hawkish stance at its next policy meeting.”
Dhawal Ghanshyam Dhanani, Fund Manager, SAMCO Mutual Fund said that the the pause on the interest rate hikes by the US Fed is the signal that the higher interest rates are the new normal. “They have made it absolutely clear that higher interest rates for longer are here to stay — in a hawkish pause. Unlike the last meet, FOMC expects the rates to be 0.25 per cent higher than current levels at the end of the year, which appears to be unlikely. Fed continues to signal a data-dependent progress on its current tightening cycle. Global bond market actions does not seem to be cheerful for equity markets and hence one has to be cautiously optimistic going ahead,” he said.
Further, Subho Moulik, Founder & CEO, Appreciate, said, “If the macroeconomic outlook continues to hold steady, rate cuts in 2024 (an US election year) could point to significant upside for US markets overall in the next 6-12 months barring any large downside surprises arising from Ukraine or China.”
Source:financialexpress.com