The US Fed on Wednesday raised rates by 75bps, 3rd consecutive jumbo rate hike (highest since CY08), to a new target range. Fed Chair Jerome Powell in his statement signalled more rate hikes going forward to tame red hot inflation in the US. The median projections for federal funds rate is now expected at 4.4% in 2022. “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t,” Powell said after officials lifted the target for the benchmark federal funds rate to a range of 3% to 3.25%. According to analysts, the hawkish Fed commentary has pushed market expectations of a reversal in policy tightening through rate cuts to 2024 from late 2023 earlier.
Powell continued his hawkish stance from the Jackson Hole in the August meeting. Powell reiterated that the central bank’s main goal is to bring the inflation under target range and for that, the interest rates need to be in ‘restrictive’ territory for a longer time period.” This is Powell’s last roll of the dice and he is going all in,” said Derek Tang, Economist at LH Meyer in Washington was quoted saying in a Bloomberg report. “The higher unemployment forecasts are fair warning they will inflict pain and this has just begun.” “Powell’s admission that there will be below-trend growth for a period should be translated as central bank speak for ‘recession’. Times are going to get tougher from here,” said Seema Shah of Principal Global Investors in another Bloomberg report.
Rate cuts by Fed unlikely in 2023
“The Fed raised the interest rates by another 75bps yesterday, as expected. This is the third 75bps hike this year. With the latest hike, the Fed fund rate (FFR) now stands in the range of 3.0%-3.25% and is highest since January 2008. The FOMC revised the median FFR at the end of 2022 up by 100bps to 4.4% from 3.4% in June, indicating a cumulative rate hike of 125 bps over the next 2 FOMC meetings this year. For 2023, the median FFR is revised up 4.6% vs. 3.8% in June, suggesting no rate cuts in 2023,” said Ritika Chhabra- Economist and Quant Analyst, Prabhudas Lilladher Pvt Ltd. These projections are much more aggressive than what investors had been pricing earlier, she added.
Possibility of another 75 bps in next meet in November
While the 75bps hike was in line with market expectations, what was worrying for market participants was the hawkish commentary by the Fed. Fed chair Jerome Powell continued to emphasise on the need to bring back price stability and a clear focus on inflation before growth and labour market. Further, “contrary to earlier expectations of a possible cool off in tightening, it now looks like there is now about 150 bps further rate action expected as per Fed implying a possibility of another 75 bps in next meet in November,” said Vivek Goel, Co-founder and Joint Managing Director, Tailwind Financial Services.
“This also means that market expectations of reversal in tightening through rate cuts in late 2023 are now pushed to 2024. Given the fact that markets were factoring most of the announcements, the immediate impact from the announcements was limited. However, going forward, it will be important to see how the aggressive pace of tightening helps in curbing inflation along with its impact on growth, job growth and global currencies,” Goel added.
Rising interest rate a headwind for Indian equities, buoyant domestic demand scenario positive
“While the rise in interest rates represents a headwind for Indian equities, our buoyant domestic demand scenario presents a sliver of hope for global investors looking to diversify globally. We remain constructive on Indian equities over the medium-term and continue to orient our portfolios around domestic cyclical which continue to look attractive to us from a medium-term perspective,” said Trideep Bhattacharya, CIO Equities, Edelweiss MF.