What did the US Fed say that is making stock markets nervous?
Stock markets across emerging economies including India could be in for a bumpy ride in the coming months as the US Federal Reserve has said that it is ready to raise interest rates in March.
More importantly, Federal Reserve chief Jerome Powell didn’t rule out moving at every meeting going forward, in a bid to try and tame inflation, which has been raging across the world over the last several months, as economies began to come on stream following worldwide lockdowns in the wake of the coronavirus pandemic.
Indeed, benchmark stock indices in India fell more than 2% on Thursday, with the BSE Sensex falling more than 1,200 points around noon to below 56,600 levels.
What did Powell exactly say in his press conference on Wednesday?
“The committee is of a mind to raise the Fed funds rate at the March meeting” if conditions are there to do so, Powell said at a virtual press conference. He said that officials have not made any decisions about the path of policy because it needs to be “nimble.”
“We will need to be nimble so that we can respond to the full range of plausible outcomes,” Powell said. “We will remain attentive to risks, including the risk that high inflation is more persistent than expected, and are prepared to respond as appropriate.”
What did the Federal Open Market Committee (FOMC) say in its statement?
After a two-day meeting, the FOMC said that “it will soon be appropriate to raise the target range for the federal funds rate,” citing inflation well above its 2% target and a strong job market.
In a separate statement, the Fed said it expects the process of balance-sheet reduction will commence after it has begun raising rates. Powell said no decision was taken at this meeting on the pace of the runoff or when it would start.
How bad is the inflation problem really?
If the data is anything to go by, consumer inflation levels in the US are at their highest at around 7% since the 1980s. Moreover, unemployment levels are back almost to pre-pandemic levels, in a clear sign that the labor market is tight and that wage bills are only likely to go north.
When was the last time the Fed upped interest rates?
The next rate hike will be the first by the Fed since 2018. Analysts predict a quarter-point increase in March, to be followed by three more this year and additional moves beyond.
“The tone of Powell’s press conference is hawkish,” Neil Dutta, head of economic research at Renaissance Macro Research told Bloomberg. “The Fed is going to be much more willing to hike faster in the face of upside inflation surprises than ease in the face of downside employment surprises.”
Having said that, critics say the Fed has been too slow in responding to inflation, and has been behind the curve so far.
What do brokerage firms say?
Credit Suisse says it was a “bit concerned” about the inflation rate that is running “very high” in the US, which could prompt the US Fed to increase interest rates much faster in the future. “Nevertheless, the market has already priced in faster tapering and one rate hike by March 2022,” it said.
Analysts at Rabobank International, too, agree and expect the US Fed to start hiking rates as we head deeper into 2022 with the first interest rate hike in March 2022.
"Recent testimony, speeches and interviews have made it clear that the FOMC is gung-ho and ready to start hiking in March.
Unless we see a setback in the real economy, we expect the Fed to hike each quarter this year," says Philip Marey, Senior US Strategist, Rabobank International, according to a Business Standard report.
"Excessive volatility is likely to continue for a few more days until clarity emerges out of the crucial Fed meet. The market is discounting a hawkish Fed. If the US central bank does sound very hawkish and indicates four rate hikes in 2022, the market will again turn weak," VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services told Business Standard.
How have the Indian markets been doing?
Indian markets, which saw a stellar run for most part of 2021, have underperformed in the past few months.
The benchmark Nifty50 has declined 7% from its October high of 18,339, as against around the 4% decline each in the United States’ Dow Jones Industrial Average and MSCI Emerging Markets Index. The MSCI World Index, meanwhile, has declined around 5 per cent.
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