US Fed decision today: How could it impact the Indian market?

US inflation Inflation cooled to its slowest pace in more than two years in June. As per reports, the consumer-price index climbed 3 per cent in June from a year earlier. It was sharply lower than the recent peak inflation rate of 9.1 per cent in June 2022.

While inflation is still above the Fed’s target of 2 per cent, the significant decline in inflation raises doubts about whether the Fed will continue raising rates as they previously projected.

Will it be the last increase of the current cycle?

There are strong expectations that the Fed may signal the end of the current rate hike cycle. A majority of 106 economists polled by Reuters believe that the July hike will be the last one of the current tightening cycle.

It seems improbable that the central bank will shock the markets this time, and it also seems unlikely that the Fed will claim its victory in the fight against inflation this early.

The Fed aims to bring inflation to 2 per cent without dealing a severe blow to the US economy. The US economy has been resilient and the unemployment rate has been historically low for over a year since the Fed started one of its most aggressive rate-hiking campaigns in history. As inflation is still above the Fed’s 2 per cent target level, the Fed may think more hikes are required to bring inflation further down.

Read more: Explained: Why has the US not slipped into a recession yet? What are the odds of a US recession in the near term?

Experts pointed out that market participants across the globe will be closely watching Fed chief Jerome Powell’s comments about the disinflation process in the US and the likely trend in interest rates.

Fed is expected to remain data-dependent to decide on rate hike trajectory. Experts believe that a substantial part of the rate hike cycle is behind us. However, for rates to reduce, more evidence of a sustained reduction in the inflationary outlook is required.

Read more: US economic soft landing hinges on Fed’s tolerance of inflation

How will Fed’s move impact the market?

Experts expect a 25 bps rate hike today and do not see any significant impact of it on the mood of the market. However, if the Fed signals that it is ready to end the rate hike cycle now, the market may see sharp gains.

“The market’s reaction tomorrow will be driven by the Fed’s commentary rather than the 25 bps rate hike, which has already been priced in. Investors need to monitor the Fed’s outlook for insights into future monetary policies and their potential impact on various sectors and asset classes,” said Anita Gandhi, Whole Time Director, and Head of Institutional Business at Arihant Capital.

G. Chokkalingam, Founder & Head of Research at Equinomics Research Private Limited expects the domestic market to remain neutral if the rate hike is just 25 bps as it is widely expected. However, Chokkalingam said if there is any surprise move to pause the rate this time then the markets across the world including Indian markets will jump significantly. Only these scenarios are possible as a 50 bps rate hike is unwarranted at this Juncture.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said that a 25 bp rate hike is already discounted by the market, and will not trigger any market move.

“If the Fed chief indicates that inflation is coming under control and, therefore, no further rate hikes are needed, that will be a big trigger for markets to move up. But such an outcome is highly unlikely since the Fed will play it safe even if inflation is coming under control,” said Vijayakumar.

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Updated: 26 Jul 2023, 01:43 PM IST