The US Federal Reserve released the minutes of the FOMC (Federal Open Market Committee) on Thursday, sparking expectations of a cool-off in the aggressive rate hikes. The US Fed, since March, has hiked the interest rate by 375 basis points in efforts to control soaring inflation levels, with the last hike at 75 bps. In the minutes released in the early hours of Thursday, the Federal Reserve reflected sentiments of implementing small hikes to the repo rate going forward. Expectations on the street indicate that the Fed may step down to a 50 bps hike, declaring another 75 bps highly unlikely.
Fed rate may rise to 4.25-4.5 per cent band by December
Deepak Agarwal, CIO, Kotak Mahindra Asset Management Company, said, “The November FOMC minutes noted that “a substantial majority” of FOMC participants agreed that a slower pace of hiking would “likely soon be appropriate. FOMC participants argued that the level of the policy rate, the uncertain lags with which monetary policy affects activity, and the incoming data would all be important factors for the future path of monetary policy.” He added, “We expect the Federal Reserve to raise the repo rate by 50 bps in the mid December 2022 Fed Meeting, increasing the Fed Fund rate in the 4.25-4.50 band. We expect the terminal Fed Fund Rate to be in the band of 4.75-5% by mid of CY 2023.”
US Dollar softened following release of minutes
Ranvindra Rao, VP-Head, Commodity Research, Kotak Securities Ltd. said, “The US dollar fell after the release of FOMC meeting minutes on Wednesday. As expected, it showed the majority of the policymakers were with the view of slower rate hikes as the Fed’s recent aggressive stance is impacting economic growth. US Dollar index closed near day low of 106.03 in the previous session, a fall by more than 1%.” Rao added that smaller rate hikes will work positively for risk assets as well as safe assets such as gold, amid a weakening dollar.
Time to assess monetary tightening impact
The smaller hikes will also provide the policymakers a space to assess the impact of the aggressive rate hike succession. Madhavi Arora, lead economist, Emkay Global Financial Services Ltd. said, “The Fed narrative is now moving towards taking stock of the cumulative tightening of monetary policy, and the lags with which monetary policy affects economic activity and inflation. The statement sounded reasonable, because any central bank would know that monetary policy works with long and variable lags. The next announcement by the Fed is scheduled for December 13-14.