US Fed policy: Political stability to outweigh higher interest rate concerns for Indian investors, experts say

Fed's cautious approach towards rate reduction due to sticky inflation and economic activities creates uncertainty for markets and emerging market central banks.

Nishant Kumar
Updated2 May 2024, 09:28 AM IST
US Fed policy: Fed Chair Jerome Powell denied the possibility of further rate hikes.
US Fed policy: Fed Chair Jerome Powell denied the possibility of further rate hikes.(AFP)

US Fed policy: The US Federal Reserve, on Wednesday, May 1, chose to keep the federal funds rate unchanged at 5.25 per cent - 5.50 per cent for the sixth consecutive time. Since July last year, The Fed has kept its key overnight interest rate at the 23-year high mark. Yet, there are no clear signs when the rates will start going down. The fight between sticky inflation and stubborn Fed may continue for longer.

The US Fed's decision to maintain its current policy rates was unsurprising for the markets. However, no clear signs on when rate reductions will begin seem to have disappointed the market.

The S&P 500 closed 0.34 per cent lower and the Nasdaq declined 0.33 per cent after the Fed's policy announcement. The US dollar and 10-year bond yields also declined in trade.

Also Read: US Federal Reserve keeps interest rates at 23-year high: 5 key highlights

Confidence is the key

The Fed is seeking enough confidence in a sustained decline in inflation before it considers embarking on rate reduction. The combination of geopolitical situations, inflation, and job market dynamics has created a complex situation for the Fed to navigate in deciding its monetary policy.

"The Committee (FOMC) does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 per cent," the FOMC statement stated.

Even though inflation has eased over the past year, it remains elevated amid expanding economic activities, strong job gains and a low unemployment rate. Moreover, there is a risk of a further rise in inflation due to the evolving geopolitical scenarios.

"Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of progress toward the Committee's 2 per cent inflation objective," the Fed said.

The wait for a rate cut will be long because the Fed would not want to risk a premature cut. The recent US macro data has indicated that achieving a 2 per cent inflation target will take time.

As Madhavi Arora, Lead - Economist at Emkay Global Financial Services, pointed out, "Given the recent disappointing progress in bringing inflation down, it will take longer than expected for the Committee to gain sufficient confidence that inflation is sustainably heading back to target and that cuts are appropriate".

No hikes, no cuts this year?

Fed Chair Jerome Powell denied the possibility of further rate hikes as he underscored that the current policy remains sufficiently restrictive. However, the Fed also does not believe it is the time to consider rate cuts either.

Dhawal Ghanshyam Dhanani, a fund manager at SAMCO Mutual Fund underscored that while the Fed remains responsive to data, the equity markets reacted positively to the assurance that the next policy adjustment would not involve a rate hike.

"It is essential to proceed cautiously, as prematurely declaring victory could occur if the Fed loosens its hold on economic control too early," Dhanani said.

Some experts believe there may be no rate cuts in the current calendar year.

"No Fed cuts in 2024, followed by shallow cut cycle is turning into a reality, as they struggle to get to the last mile of disinflation," said Arora.

"Powell downplayed the possibility of further hikes and stressed that it’s clear that policy is restrictive. He pointed to the cooling off in labour demand and the softness in interest-sensitive spending, particularly housing and capital spending, as an outcome of restrictive policy. Powell saw three likely paths, and none had a hike outcome: (1) persistent inflation = no cuts, (2) falling inflation= cut, (3) weaker labour = cut," Arora observed.

Also Read: US Fed to unveil third policy decision for 2024 today: JPMorgan, Goldman Sachs expect first rate cut in July; here's why

What should Indian investors do?

Fed's monetary policy will influence the policy decisions of emerging market central banks but experts do not see a major risk unless there are growth shocks.

"Fed's policy stance is already spilling over to emerging market (EM) central banks, including the RBI. But unless it is accompanied by immediate negative growth shocks, we don’t see a collapse in EM risk assets, and we believe that the cherry-picking theme will work relatively well for India assets," said Arora.

The majority of analysts believe that investors should focus on domestic factors as the market has fairly discounted the status quo by the Fed for a longer period.

As India's economic outlook remains bright, experts advise investors should play domestic themes. They say political stability after the Lok Sabha election will be the biggest trigger for the market.

"For the Indian market, political stability is more important. It will outweigh concerns over higher interest rates," said G. Chokkalingam, Founder and Head of Research at Equinomics Research Private Limited.

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.

 

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First Published:2 May 2024, 09:28 AM IST
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