While the US Fed, continuing on its path of achieving maximum employment and an inflation rate of 2 per cent, went for another rate hike of 25 basis points, what’s the outlook for the interest rate movement going forward? According to economists and experts, the US Fed will maintain a pause this year and may not reduce interest rates in the near future. “From the commentary and press conference we may infer that this is the last rate hike. There will be a long pause and we may not expect a rate cut any time soon. Our policy is largely driven by domestic factors. But a pause is good for the currency as it means the dollar will not be getting stronger,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
“It appears the pause is for good, especially as the ex-ante real rates at ~1.4 per cent gives comfort and flexibility on their supposed stance and actions,” said Madhavi Arora, Lead Economist, Emkay Global.
“While the Fed has hiked the policy rate by 25 bps on expected lines, it has hinted at a possible end to rate hiking cycle. Looking ahead, we believe Fed’s future policy moves could be data dependent, as the full impact of the cumulative 500 bps rate hikes continues to work through the economy. With inflation unlikely to come down to the Fed’s target of 2 per cent in 2023, we do not expect the Fed to cut rates during the year,” Rajani Sinha, Chief Economist, CareEdge.
While others hoped for rate cuts going forward. “We would have preferred that the Federal Reserve not raise interest rates, given the current state of the banking industry in the US. It is our belief that this will be the final rate hike from the Fed this year, and there is a high probability that the Fed will begin reducing interest rates in the second half of 2023,” said Sunil Damania, Chief Investment Officer, MarketsMojo.
This is the 10th interest rate increase in just a little over a year and the US Fed also dropped a hint on the end of the tightening cycle. While Chairman Jerome Powell said “a decision on a pause was not made today”, he maintained that the change in the statement language around future policy firming was ‘meaningful’. The Fed is aiming to bring the inflation under 2 per cent.
On expected lines, the US Fed raised interest rates unanimously by 25 basis points to a target range of 5.00-5.25 per cent. “With the Fed acknowledging modest expansion in economic activity, robust job gains and elevated inflation, we believe that the Fed is still holding cards close to its chest on future rate hikes as it is still determining whether additional firming may be appropriate,” said Manish Chowdhury, Head of Research at Stoxbox.
Effect of US Fed rate hike on India
After the outcome of the US Fed meeting on expected lines, experts believed that this will not have a material impact on India in the short run as “RBI has paused the rate hikes and there is weakness in the crude oil price”. Rajani Sinha added, “As far as India is concerned, decisions by the RBI will be more dependent on the domestic growth and inflation dynamics. With inflation likely to moderate, we feel RBI is likely to remain on hold this year.” However, she further maintained that any weather-related disruptions and its adverse impact on domestic inflation remains a risk. RBI had, in April, hit pause on the repo rate hike cycle, leading experts to believe that the RBI had broken away from following the cues laid down by the US Fed.
“As far as US dollar-rupee is concerned, FOMC is largely a non-event as markets had priced in the moves from the Fed. Going forward trend in USD will be driven by risk sentiments and data flow from the US economy. If the US economy begins to slow down, we could see the US Dollar weaken as traders begin to bet on aggressive rate cuts from the Fed,” said Anindya Banerjee, VP – Currency Derivatives & Interest Rate Derivatives, Kotak Securities Ltd.
