A majority of experts believe that the Fed will maintain a pause on interest rates for the second consecutive time after the conclusion of the two-day meeting of the Federal Open Market Committee (FOMC) on Wednesday.
At its previous policy meeting on September 20, the US central bank left benchmark interest rates unchanged, with a range of 5.25 percent to 5.50 percent.
While the market appears to be factoring in a pause in rates, investors and economists will be looking for signals on whether the Fed will opt for interest rate cuts in the near term or maintain a more dovish stance by signaling further rate hikes.
Also read: US Fed policy outcome: 6 key things that will be on the Fed’s mind before making a rate decision today
(Exciting news! Mint is now on WhatsApp Channels. Subscribe today and stay updated with the latest financial information! Click here!)
No migrations; no cuts
Except for a few, experts do not expect the Fed to surprise the market by raising or cutting rates, as the US economy remains strong and inflation remains above the Fed’s 2 percent target.
The gross domestic product (GDP) of the United States expanded at an annual rate of 4.9 percent in the September quarter, the US Bureau of Economic Analysis (BEA) first estimate showed on Thursday, October 6.
Meanwhile, US labor costs rose significantly in the September quarter amid strong wage growth. According to a Reuters report, citing data from the Labor Department’s Bureau of Labor Statistics, the Employment Cost Index (ECI), the broadest measure of labor costs, rose 1.1 percent in the latest quarter after increasing 1 percent in the period from April-June.
Against inflation, the personal consumption expenditures price index rose 3.4 percent in September and the core PCE price index rose 3.7 percent, according to a Reuters report.
Robust economic growth is a factor that may give the Fed comfort in keeping interest rates high for some time.
VK Vijayakumar, Chief Investment Strategist at Geoit Financial Services also believe that the US Fed will most likely hold rates at this meeting, but the message from the head of the Fed Powell will be hawkish because the economy is surprisingly robust with 4.9 percent growth in Q3 GDP.
The high bond yields in the US also indicate that the market expects the higher for longer rate to continue for some time, Vijayakumar said.
Deepak Jasani, Head of Retail Research at HDFC Securities expect the US Fed to hold interest rates steady at the current 22-year high level on Wednesday.
Jasani said investors will analyze the outcome and the accompanying signals for hints about the likely timing of the reversal of the rate-hike cycle and the Fed’s view on labor markets, inflation and economic growth. Investors hope that the US Fed will not sound bullish on interest rates, which remain higher for longer as in the previous meeting.
G. Chokkalingam, Founder and Head of Research at Equinomics Research believes that the US Fed is likely to keep the reference interest rates stable and monitors the impact of cumulative rates already implemented on the economy and corporate world.
Nishit Master, Portfolio Manager at Axis Securities PMS expect the US Fed to stay put and not change rates in this FOMC meeting.
“We expect the president of the US federal federation to repeat his commitment to fight against inflation and indicate that although inflation has started to moderate, the recent geopolitical tensions have increased risk on the top for inflation. This could introduce a December tax, especially if oil. prices are going up,” said Master.
Trivesh D, COO of Tradejini said the Federal Reserve was prepared to maintain its resolutely hawkish stance, showing no intention of cutting its interest rates, which are currently at a 22-year high, as part of its strategy to fight inflation.
“The Fed is expected to maintain its current short-term interest rate, providing perhaps the most explicit signal yet that it is nearing the conclusion of its rate hike campaign. This approach is intended to control inflation while monitoring the broader economic landscape,” said Trivesh.
How will the Fed’s decision affect the Indian stock market?
Stock market experts anticipate a muted response to the decision by the US Federal Reserve.
Vijayakumar said that since no surprise is expected from the outcome of the Fed meeting, the market is unlikely to be affected. But the high bond yields will weigh on markets and foreign institutional investors (FIIs) can expect to continue selling. Vijayakumar said the ensuing weakness in sectors such as financials, where the FIIs hold a major segment of their holdings, will provide buying opportunities for long-term investors.
Jasani said global markets, including India, expect the US Fed to keep rates on hold and therefore if it materializes, it itself may not affect their trajectory. However, if there is a surprise (positive or negative) in the Fed’s comment, then it could have an impact on Indian markets, although less than that in other developed economies.
Axis Securities PMS chief pointed out that the no-rate-hike scenario for this FOMC meeting means that the rate decision itself is a non-event for Indian stock markets, while the US Fed Chair’s tone for future performance will determine the direction for global stock markets.
Trivesh said that the policy decision is unlikely to cause major effects in the Indian stock market as market participants have already integrated the effects of these record interest rates.
Chokkalingam also said that domestic equity will remain unaffected by the US Fed event. However, he said, given the resilient US economy and decent corporate earnings, there is little chance of a rate hike that could trigger a correction in the market.
“There is a remote possibility of another small hike this time around. The US economy remains robust, employment levels are strong, corporate earnings remain decent as the corporate world sees low defaults and their balance sheets are quite strong. In such a scenario, there is remote chance of a small tariff this time. If that happens, our markets could correct up to 2 percent immediately,” Chokkalingam said.