US Fed pauses rate hike; where is the equity market headed?

Federal Open Market Committee (FOMC) of the Federal Reserve maintained the status quo in the rates in the September meeting. The federal funds rate remained unchanged at a range of 5.25%–5.5%, nearing a 22-year-high.

Updated quarterly predictions revealed that 12 of the Fed’s 19 officials supported another rate raise in 2023. Also, next year, policymakers anticipate less easing. This means the rates are expected to remain higher for a longer duration. The real impact on the economy and on the balance sheet of the companies remains to be seen.

Jerome Powell had this to say to the market observers, “We are prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we’re confident that inflation is moving down sustainably toward our objective.”

Here are some reactions from market experts:

Manish Chowdhury, Head of Research, StoxBox says, “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. 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 by 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.”

Viram Shah, CoFounder and CEO of Vested Finance says, “Despite the Federal Reserve’s decision not to hike rates, markets showed a negative response. This decline can be attributed to the perception that the Fed will maintain these higher rates for an extended period of time, possibly longer than what was initially forecasted. While there was anticipation of a sizable rate cut in 2024, between 100 to 125 basis points, new indications suggest this adjustment might be postponed.

Higher interest rates can increase borrowing costs for companies, leading to reduced corporate profits. Furthermore, as safer assets like bonds start offering better returns due to the higher rates, equities might become less attractive to investors.”

Rohit Arora, CEO and Co-founder, Biz2Credit and Biz2X says, “As expected the Fed kept a hold on the interest rates while signaling another rate hike of 25 bps before the end of the year. The major policy is that the Fed indicated that interest rates will remain higher for longer than expected. Based on the 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.

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 a longer period of time.”

Naresh Tejwani, Abans Group says, “US FED’s decision to defer rate hike, although expected, may keep global markets on tenterhooks. Inflation in the US is as yet high and other economic parameters are still showing little signs of slowing down. US 10 year at 4.472 % and 2 year at 5.184 % does reflect the expectation that before year-end further rate hikes may be expected.”

Trivesh D, COO of Tradejini says, “The Federal Reserve (Fed) remains resolute in its hawkish stance, aiming to combat persistently high inflation, which exceeds the sustainable 2% level. This stance has triggered mixed reactions on Wall Street, with some experts optimistic about a soft economic landing. With the Fed hinting at the end of the rate-hiking cycle, there’s potential for increased Foreign Portfolio Investor (FPI) participation in India’s growing markets, particularly for long-term investors.

Even without further rate hikes, the Fed may maintain elevated benchmark rates to curb inflation, potentially leading to credit challenges. Surprisingly, the US economy continues to outperform expectations, giving the Fed room to maneuver.”