US Federal Reserve delivered the rate hike on expected grounds. The 75 basis points hike which takes the total rate hike in 2022 to 2.25 percent is directed towards taming inflation. “With the objective of bringing down CPI inflation to about 2%, the US Federal Reserve has been tightening rates and reducing liquidity. The hike of 75 bps was as per market expectations and hence was greeted by a short covering rally in the US markets,” says Sandeep Bagla, CEO, Trust Mutual Funds.
The immediate impact of rate hikes are on the stock market and the valuations that some of the stocks enjoyed. Both S&P 500 and Nasdaq are flirting in the bear market territory. What’s in store in the near future remains to be seen. “It will be important to evaluate the impact of recent tightening measures taken by the policymakers in the next few months to be able to estimate the trajectory of future policy actions towards curbing inflation while supporting growth,” says Vivek Goel, Co-founder and Joint Managing Director, Tailwind Financial Services.
The rising interest rate scenario may initially have a negative impact on the economy and in turn on the stock market. Over time, how much impact higher rates have on the bottom line of companies will play a role in stock market performance.
Bagla explains how rising rates may impact equities – The increase in US rates and tightening of global liquidity in the form of Quantitative Tightening will lead to dampening of demand, which should lead to lower growth and profitability for the corporate world. Also, the opportunity cost of deploying money in markets will go up.
Slower growth prospects, lower profitability, and higher discounting rates generally lead to lower stock markets. Over the next few months, as global central banks hike rates, even if as per market expectations, do not augur well for risky asset classes like equities.