US Fed preview: Rate hike or a pause? Experts weigh in

The US Federal Reserve is expected to keep interest rates steady at a 22-year high in its policy meeting on October 31-November 1 even as the US economy remains resilient despite high interest rates while inflation still remains above the Fed's 2 per cent target level. In its last policy meeting, the Fed had left the benchmark interest rates unchanged at 5.25 per cent - 5.50 per cent.

As Mint reported earlier, the gross domestic product (GDP) of the US expanded at an annualised rate of 4.9 per cent in the third quarter, the US Bureau of Economic Analysis (BEA) first estimate showed on Thursday, October 6.

The US economy grew at the fastest pace in nearly two years, buoyed by strong consumer spending in spite of higher interest rates, ongoing inflation pressures, and a variety of other domestic and global headwinds.

Meanwhile, inflation has cooled off significantly but remains well above the Fed's 2 per cent inflation target.

"The personal consumption expenditures price index, which is the Fed's preferred inflation gauge, rose 3.4 per cent in September from a year earlier, a Commerce Department's Bureau of Economic Analysis report showed on Friday, and the core PCE price index, which the Fed takes a signal for future price pressures, rose 3.7 per cent. That's down from a 3.8 per cent reading in August but well above the Fed's 2 per cent inflation target, reported Reuters.

Experts expect the Fed to keep interest rates at elevated levels for a longer period.

"As of now, we still think July was the last hike, but we do reckon that the resilience in both Inflation and growth is reinforcing the higher-for-longer stance even as financial and geopolitical shocks loom over the outlook," said Madhavi Arora, lead economist at Emkay Global Financial Services.

Experts also point out that the Fed may cut rates in June next year as the current geopolitical situation and trends in the economy suggest it is not the right time for the Fed to start thinking about rate cuts.

“With geopolitical uncertainty impacting sentiment, the timing may not be opportune for a rate hike,” said Aditi Nayar, Chief Economist, Head of Research and Outreach, ICRA.

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Yields may remain higher

The US 10-year bond yield, which serves as an important indicator for worldwide interest rates on borrowing, has jumped sharply by 86 basis points, from 4.09 per cent on August 31 to 4.95 per cent now on expectations of further rate hikes.

It’s widely expected that the Fed won’t raise rates this time around but will do so in December. That may give a boost to bond yields.

"The recent US 10-year bond yield surge indicates that we may see one potential rate hike in the upcoming FOMC meeting. The current GDP prints from the US have all pointed to a pretty robust economy, and hence, the US 10-year bond yields could remain elevated for extended periods than some parts of the market have been expecting. The second half of 2024 (H2CY24) is perhaps when we could start to see a softer bond view, but stubborn inflation and growth prints at the moment keep expectations muted," said Pranav Haridasan, MD & CEO of Axis Securities.

Also Read: US 10-year bond yields near 16-year high. How can it impact Indian stock market?

Anitha Rangan, Economist at Equirus pointed out that the US economy remains steady and inflation and wages also remain tight. So this means 'higher for longer'.

Rangan said rate hikes don’t matter much anymore, but it is how long the Fed may have to keep rates elevated.

"The longer they have to stay higher, the risk of intermittent rate hikes increases. While there is near consensus for a pause next week, a hike does not mean rate hikes alone. The baton of Fed rate hikes has shifted from the Fed to the treasury yields," said Rangan.

"Treasury yields irrespective of Fed outcome have risen on the risk of continued supply of US treasuries. As the US continues to issue long-dated treasuries to fund its fiscal deficit, yields will also continue to remain elevated. In addition, every central bank always has other tools (other than rates) and in the Fed’s case QT (quantitative tightening) at their disposal to tweak yields in the system. Overall, rate hike or not, the outcome may be that yields will remain higher for longer," said Rangan.

Also Read: Mint Primer: What the spike in US bond yields means for you

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