How likely is it that the US Fed will hike rates by 50 basis points in the May Fed meeting and what does that mean for India?

As of now it looks very likely that the US Fed would hike the rates by 50 bps in the 04th May meeting of the Federal Open Markets Committee. This was almost inevitable after the Mar-22 consumer inflation came in at 8.5%. Now, the latest speech by Jerome Powell at the IMF Spring 2022 Meeting has stated in no uncertain terms that there would be a 50 bps rate hike in the May meeting. He has also given indications of more tightness to come. Here is a gist of what Powell said at the IMF Spring Meet.

Powell has made some unambiguous and interesting statements on monetary policy front.

a) Fed rates are very likely to be hiked by 50 basis points in the 04th May meeting of the FOMC. That would effectively mean that the new Fed rate, post May will go up from the range of 0.25%-0.50% to the range of 0.75% to 1.00%.

b) This will be the first time in the last 16 years, actually it last happened in 2006, that there is likely to be 2 back-to-back hikes in interest rates in consecutive policies. In March 2022, the Federal Open Market Committee (FOMC) had hiked rates by 25 bps.

c) This will also be the first time in the last 22 years, it last happened in the year 2000, that the Fed is likely to be increasing rates by 50 bps in one single shot. Since 2000, all rate hikes have only been of 25 bps each.

d) Powell has also promised to be hawkish beyond that. He even hinted that apart from the 04th May FOMC meet, Fed will hike rates by possible 50 bps in the 15th June FOMC meet along with one more instance of 50 bps rate hike in the year 2022 itself.

e) This also changes the target rates by the end of 2022. IT was formerly envisaged that by end of year 2022, rates would beat a level of 2.00%-2.25%. Now that targets goes up to 2.75%-3.00% by the end of this year.

f) Powell not only confirmed the high probability of aggressive rates but also made it look inevitable that it would use a double whammy. Apart from aggressive rate hikes, Fed will start shrinking the bond book at $95 billion per month from May 2022 itself.

So, what is the bottom line and what does this mean for India. Clearly, the RBI has to contend with a huge 50 bps rate hike by the Fed in May and that could have implications for its June policy. However, EU is not in sync and that would mean that while May rate hike will certainly happen, beyond that it would not all that simple. Even the US does not want to risk too much of monetary divergence. That could be a blessing in disguise for India too.