Home / Markets / Mark To Market /  US Fed taming inflation fears could make equity markets more complacent

MUMBAI: There wasn't anything substantially different in the US Federal Reserve's latest policy statement in terms of action and communication. Yet, with the US central bank taming inflation fears, market participants heaved a sigh of relief.

In a widely expected move, the members of the US Federal Reserve's policymaking committee voted to keep short-term borrowing rates near zero. The central bank raised its expectations for economic growth,but indicated that there will likely be no interest rate hikes through 2023. The US Fed is of the view that spike in inflation would be short-lived.

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According to analysts, a takeaway for equity markets from Fed's statement is that the central bank is likely to stick to its accommodative stance even as the economy recovers.

"The Fed decision look supportive for risk sentiment and for a weaker US dollar, as the Fed projected much stronger growth this year and higher inflation without raising the median forecast for the timing of the first rate hike, which remains for 2024. This suggests the Fed is more than willing to let the economy run hot for now without reacting with leaning against inflationary pressures," John Hardy, head of forex strategy at Saxo Bank said in his latest blog.

"For now, then, the key point is that the Fed is not buying into the idea that an initial increase in inflation as the economy reopens could become embedded in 2022 and 2023, via increased expectations and upward pressure on wage growth. As long as the majority stick to that view, they'll push back against market inflation fears, at least verbally," Ian Sheperdson, chief economist at Pantheon Macroeconomics said in a note on 18 March.

Analysts say this could make global equity investors more complacent. The CBOE volatility index - also known as the fear gauge, declined to 19.23 on Wednesday, this is the lowest since 21 February 2020.

Recently, equity investors have been worried that higher-than-expected inflation could prompt global central banks reverse their accommodative monetary stance. According to BofA Securities' latest global fund manager survey, inflation is seen as the top most tail risk for the markets.

Meanwhile, global equity markets reacted positively to Fed's commentary with key Asian equity indices advancing 1-1.5% on Thursday.

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