The US Fed delivered what the market expected but with a twist in the tale. The Federal Reserve maintained the current level of US interest rate, however, indicated that more increases are likely given hawkish projections for the economy.
Following 10 consecutive rate increases over the previous 15 months, the Federal Reserve has maintained the Fed Funds target rate at 5-5.25% in line with the data thrown up by the recent CPI and PPI reports.
The hawkish tone of the Fed officials emerged from a close look at the latest dot plot. The March dot plot suggested that rates had likely peaked, but these June estimates show that two more rate increases are anticipated before they turn around in 2024 and decrease rates by 100 basis points.
How the global market experts are viewing the decision and predicting the future is as below:
Viram Shah, Co-founder, CEO, Vested Finance
Following the Federal Open Market Committee (FOMC) meeting, the Federal Reserve signalled the possibility of two more rate hikes this year to counter inflation, which led to a temporary downturn in major U.S. stock indexes, including the S&P 500 and Nasdaq Composite. Despite the initial drop, these indexes later recovered some losses. This unexpected warning came on the heels of a “pause” in the rate hikes, breaking the chain of increments seen in the 10 prior meetings since March 2022.
The Federal Reserve’s indication of further rate hikes could offer a silver lining for Indian investors in the US markets. A higher interest rate typically strengthens the dollar, which translates to increased returns for foreign investors holding dollar-denominated assets. Besides, a firmer stand against inflation fosters a more stable and predictable economic environment, which is beneficial for long-term investments. Consequently, Indian investors with stakes in US markets may find their investments becoming more valuable.
Nigel Green, CEO, deVere Group
The US Federal Reserve must now stop interest rate hikes due to the ‘notorious time lag’ of monetary policy, which typically takes about 18 months to two years for the full effect of rate hikes to filter fully into the economy.
The battle against inflation is being won. This is now the time for the Fed to stop – not pause – interest rate hikes. Investors are increasingly concerned that with more hikes the Federal Reserve could steer the US economy into a major recession. Of course, the central bank will argue it needs to continue with rate rises to bring inflation back to target.
Carolane De Palmas, Crypto and Financial Content Expert at ActivTrades
Following 10 consecutive rate hikes, the FOMC (Federal Open Market Committee) reached a unanimous decision to maintain the target range at 5%-5.25% during its June meeting, which is the highest level in 16 years. However, markets can expect two more rate hikes later in the year that seem necessary to bring inflation back towards its 2% target.
Although there was overall agreement, committee members held different views about future rate hikes. Two members believed that there would be no rate hikes this year, while four members anticipated a single increase. Nine members expected two additional rate hikes, and two members suggested the possibility of a third hike. One member even predicted four more hikes, each with a quarter-point increase.
In addition, the committee members revised their forecasts for the fed funds rate. They now project a rate of 4.6% in 2024 and 3.4% in 2025, up from the previous forecasts of 4.3% and 3.1% in the March Summary of Economic Projections.
When determining the extent of policy tightening required to achieve a 2% inflation rate, the Fed highlighted the need to consider the time delays involved in how monetary policy affects the overall economy and inflation.
Currently, the job market remains quite resilient, the US growth is expanding at a modest pace and the latest US inflation data show positive trends compared to previous months. In May, consumer prices increased by 4% over the past year, marking the lowest level since March 2021. This represents the 11th consecutive month of inflation slowdown, significantly lower than April’s rate of 4.9% and slightly below economists’ predictions. These factors likely influenced the Fed’s decision to take a moderate approach at this meeting.
In addition to economic indicators, the Fed will closely monitor credit conditions and the stress levels in the regional banking sector, as these factors can significantly impact US growth and potentially pose a threat to the expected soft landing.
Dhawal Ghanshyam Dhanani, Fund Manager, SAMCO MF
Bond markets across the world are in no mood to budge, making it difficult for the Fed to soften their stance on interest rates. Though the Fed resonated a hawkish pause after 15 months of consistent rate hikes, they signaled increased tightening by the year-end.
Currently, bond yields globally have even pipped the already elevated interest rates. If interest rates does not fall, investors may expect tectonic shifts in global markets. Therefore, one has to be watchful and precisely follow trends in global bond yields which would deliver important cues on equity investing. As of now, bond market’s behaviour does not seem to be encouraging for equity markets and hence one has to be cautious.
Deepak Agrawal, CIO- Fixed Income, Kotak Mahindra Asset Management Company
The FOMC surprised markets with a hawkish pause, projecting two rate hikes in 2023, contrary to the expected one rate hike. The gradual pace of decline in core inflation led to this adjustment. Fed Governor Powell highlighted balanced risk of over tightening and under tightening the Fed Fund rate and advocated for a gradual approach as the fed fund nears its target.
We expect a final hike in July 2023 to 5.25-5.50%, but anticipate a subsequent hold for the rest of CY 2023, because core inflation would have come meaningfully lower.
Manish Chowdhury, Head of Research, Stoxbox
The US Federal Reserve played on market tunes and kept a status quo stance at its policy meeting yesterday. There was a pause in rate hikes after ten consecutive policy tightening as the central bank bought time to assess the impact of earlier five percentage points hike on the economy, especially on the inflation and labour market front.
Though the script played well to our expectations, what surprised us was a more hawkish policy stance from the Fed going forward wherein it expects a further 50 basis points hike in policy rates before the end of this year. We just hope that a very hawkish pause at this policy meeting does not derail the economic growth prospects, considering that transmission of policy interventions works with a long and variable lag on the varied aspects of the economy.
Ruslan Lienkha, chief of markets, YouHodler
It is too early to say that Powell is winning the fight against inflation. I don’t think the way to bring inflation to 2% will be so smooth. The main concern is about the too-hot labor market at the moment. Therefore, the Fed can later decide to continue the rate increase or keep high rates for a significantly long time. Such scenarios are quite possible and might obviously disappoint financial markets in one or a few months.
Ghazal Jain, Fund Manager- Alternative Investments, Quantum AMC
Looking beyond, the Fed Chair Powell did admit that the effects of their cumulative tightening are yet to show up yet insisted on further tightening. It’s becoming clear that the Fed is prepared for a growth setback if required to bring inflation down to its target. Resulting volatility in risk assets and risk aversion will keep gold relevant as a portfolio diversifier. When the Fed pauses for good, gold prices will remain rangebound but well supported as markets price in the next (dovish) leg of Fed policy. Eventually, when the Fed’s hawkishness runs out of steam, either as inflation backs off or as it stumbles upon an economic shock, gold prices will be driven higher by lower interest rates and a softer US dollar.