The chances of a Fed rate cut in the calendar year 2024 (CY24) are getting dimmer because the US central bank is having a hard time reducing inflation. This could affect other central banks in emerging markets, including the Reserve Bank of India (RBI), according to Madhavi Arora, Lead Economist at Emkay Global Financial Services.
Arora in a note on March 20 wrote, "We see a high probability of ‘no Fed cuts’ in 2024, as they struggle to get to the last mile of disinflation. This will soon spill over to emerging market (EM) central banks, including the RBI".
The FOMC’s (Federal Open Market Committee) interest rate decision is due on March 20. All eyes are on the US Fed meet outcome and Fed Chair Jerome Powell’s press conference after that.
Also Read: Federal Reserve meet in focus: Will the Fed give clear signals on rate cuts? Top experts weigh in
While the pace of disinflation has slowed and underlying inflation remains elevated, Arora believes there is limited scope for inflation to come down to 2 per cent. This could push the Fed to keep the policy slightly restrictive.
"With inflation stuck between 2.5-3 per cent, we see the Fed returning to the mid1990s strategy of 'opportunistic disinflation': an approach in which the Fed doesn’t take further strong action against inflation, but keeps policy modestly restrictive and waits for external events like favourable supply-side shocks, or an unforeseen recession to finish the job," said Arora.
Also Read: US Fed meet begins today: 3 key things that may influence Fed's interest rate decision and more
Due to a modestly restrictive policy, there could be a shallower rate cut cycle or no cuts at all till December 2024, Arora believes.
The expectations of the Fed rate cut have been a major trigger for the market and a delayed rate cut could be disappointing. However, Arora does not expect a crash in emerging market assets.
"Even with Fed rate cuts timing and quantum getting repriced frequently, US exceptionalism has generally kept global demand and risk assets afloat. A delayed US rate cut cycle may not necessarily change that trend," said Arora.
"For sure, it will spill onto emerging market central banks, including the RBI, but unless it is accompanied by an immediate negative growth shock, we don’t see a crash in emerging market risk assets. That said, neither do we think recession is entirely denied (i.e. it is only delayed), nor do we believe that risk assets will behave without volatility," she said.
Arora believes there could be some upward repricing in the US 10-year treasury which may reverse towards the second half of the year but still stay above 3.5 per cent. Indian rupee and Indian bonds, due to fundamental reasons, could remain a cherry-picked play in emerging markets.
Arora underscored that markets have already taken into account that the Federal Reserve (Fed) will reduce interest rates more slowly. This expectation is reflected in how investors are pricing assets related to other central banks in developed countries.
While this has not yet spilt over into emerging market central banks, it could change following the upcoming FOMC meet, she said.
Arora expects the US growth momentum to slow further into 2024 with the lagged effects of 525bps rate hikes.
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
Catch all the Business News , Economy news , Breaking News Events andLatest News Updates on Live Mint. Download TheMint News App to get Daily Market Updates.