Mint Explainer: What the Fed’s ‘hawkish pause’ means for markets

However, the Fed signaled that it is a hawkish pause, with the majority of officials saying there could be one more rate hike this year. This has added to the general uneasiness and kept market participants nervous. It has led to a rise in US bond yields and strengthened the dollar. 

With interest rates likely to stay higher for longer, concerns about a global slowdown have also increased and expectations of interest-rate cuts have been deferred, weighing on markets.

Impact of rising bond yields and a stronger dollar

US bond yields, already at a 16-year high, strengthened further after the FOMC decision on interest rates. The 10-year US bond yield stood at close to 4.4% while two-year bond yields shot up 8.6 basis points to 5.18%. Expectations that interest rates will remain high for longer than previously expected makes emerging markets such as India less attractive foreign portfolio Investors and is thus likely to affect fund flows to such markets. Higher treasury yields are also strengthening the US dollar and this, too, is likely to result in reduced funds flows to emerging markets.

More pressure on FPI flows

Foreign portfolio Investors were net sellers to the tune of ₹3,983 crore in the Indian markets from 1 to 20 September, according to NSDL data. This negative fund flow has put pressure on the markets. Even though domestic institutional investors continued to support the markets, providing some cushion, FPI inflows are also required for gains. Foreign fund flows remained positive from March to August, during which time the Sensex gained almost 10%.

Rising concerns of a global slowdown

Expectations that interest rates will remain high for a prolonged period are raising worries of a global economic slowdown. The Fed’s US GDP growth projections indicate a slowdown in the calendar year 2024. These growth projections now stand at 2.1% for 2023, and may soften to 1.5% in 2024 before recovering to 1.8% in 2025, according to the central bank. This slowdown is of course not favorable to countries such as India, despite their strong domestic growth outlook. Several sectors, including Information technology, chemicals, contract manufacturing, and other export-oriented ones could feel the heat.

Interest rates cuts? Take a hike

Before the Fed’s latest announcement, expectations were that interest rates were likely to have peaked. But with the majority of officials saying there’s probably still one more quarter-point hike to come this year, market sentiment has turned negative, and many experts have extended their forecasts of an interest rate cut.