InvestorQ : What exactly did the Fed say on Wednesday that the Indian markets were so excited?
Aashna Tripathi made post

What exactly did the Fed say on Wednesday that the Indian markets were so excited?

Aditi Sharma answered.
2 weeks ago

On 27th of July, the Fed statement set the debat to rest over whether the Fed would hike by 75 bps or by 100 bps. Fed settled for 75 bps rate hike but continued to hold its hawkish tone. In fact, behind the subdued tone of the Fed was a lot of hawkishness intact. The Fed has clearly stated that it would not hesitate to hike rates by another 75 bps in September if the scenario demanded. Above all, what is scary is that Jerome Powell is unperturbed by recession fears and prefers to look at labour robustness than the risk of GDP slowdown.

Broadly, the gist of the Fed announcement can be summarized in the following points.

· Fed has already hiked rates by 225 basis points since Marc and by 150 basis points in just June and July. Hoewver, Powell has not ruled out further rate hikes even to the tune of 75 bps if the inflation continued to be sticky. This is as hawkish as the 1980s.

· The good news is that the Fed would be more data driven in the future and hence has refrained from making any numerical commitments. In short, a lot will depend on the 2 inflation and employment readings that will come ahead of the September meeting.

· Powell has himself confirmed that at 2.25%-2.50% range, the Fed rate is already at the neutral level. Beyond this level, each basis point hike in interest rate will have a clear negative impact on GDP growth, so that is where the real battle starts.

· One thing that emerges is the difference in interpretation of slowdown. Fed is relying on the strength in the labour market to assess robustness while the markets focus on GDP growth estimates. That is where the dichotomy arises.

· Growth could be a a big casualty if the Fed persists with its current aggressive policy. Despite strong labour data, high rates have slowed sales in the housing market. Q1 GDP has contracted and Q2 is likely to be flat at best. Inverted yield curve is not a good sign.

The Fed is betting on a soft landing, but markets believe that it would not just be a simple soft landing. The markets believe that it may take a full-fledged recession with mounting unemployment to slow inflation. Fed is looking for the slack, which may be a slowdown.

Finally, the question remains as to why the Indian markets were so excited. It may be more of a knee jerk reaction. The Fed stays as hawkish as ever and its target is still in the range of 3.50% to 3.75%. Also, most of the rate hikes are likely to be front-ended so RBI will face most of the divergence pressure in the current year itself. News may not be too great.