The US Federal Reserve’s struggle against rising inflation has thrown the stock market into disarray. The bull run experienced since the Fed’s cheap money policy following the Covid outbreak encountered a snag as inflation began to rise. The Fed then began its aggressive rate raise campaign, making stocks to slump from their high valuations. In an interview with Financial Express Online, Sunil Damania, Chief Investment Officer, MarketsMojo shares his views on the importance of Fed’s monetary policy decisions for the investors and what the Fed needs to do in the curent scenario. Excerpts:
Global investors keep a close watch on US Fed action. How important are the Fed’s policies for the equity markets?
The policies of the US Federal Reserve have a significant impact on the equity market worldwide, and global investors closely monitor its actions. The Fed’s policies also influence other central banks’ monetary policies, making it one of the most closely watched central banks globally.
What, according to you, is the likely move by the Fed in June?
The April inflation rate of 4.9% was slightly lower than the expected 5%, but still above the Fed’s target rate of 2%. While the trend is moving downward, the Fed must be cautious about pausing before inflation is fully controlled. The US banking situation remains fragile, and too many interest rate hikes could destabilize the financial system.
However, taking a pause without sufficient control of inflation could also backfire for the Fed. The Fed must find a fine balance between maintaining stability in the financial system and addressing inflation. The priority at present is to stabilize the financial system.
How do you expect the stock market to move , if the Fed chooses to pause in June or when the possibility of a rate cut arises anytime in 2023?
Since the beginning of 2023, we have maintained our belief that the Fed will cut rates in the second half of the year due to the demands of the financial system, economy, and inflation trajectory. We believe that the Indian market will significantly outperform the US market in 2023, similar to what happened in 2022. Looking ahead, we strongly believe that the Indian market will continue to outperform the US market even in dollar terms over the next three years.
Is the US moving into recession? By when and what could be the factors leading to a soft or a hard landing of the economy?
Our base case scenario is that there is a 60% probability of a soft landing and a 40% probability of a hard landing. If a recession were to occur in the US, we believe it would be brief in duration.
