Fed policy meet begins today: How will the US Fed interest rate decision impact the stock market?
There is a prevailing expectation that the US Federal Reserve will opt to maintain its current interest rates during the meeting on September 19-20 despite persistent inflation levels exceeding the central bank’s target range while the US economy remains resilient.
The two-day Federal Open Market Committee (FOMC) meeting begins today (September 19) and its outcome is due on Wednesday (September 20).
The US Fed has been raising rates since March 2022 and this could be the second time since then that the Fed may maintain a pause on interest rate hikes. While a pause seems highly likely, the possibility of a rate cut is extremely feeble at this juncture.
Markets across the globe will closely watch what the US Fed Chairman Jerome Powell says about inflation and the US economy.
Fed may leave rates unchanged
The Fed is expected to maintain a status quo on rates in September but experts see a possibility of one rate hike in the coming policy meetings.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services believes the Fed will likely hold rates this time but the tone of the Fed commentary will likely be a bit hawkish since inflation continues to be high despite some easing.
Vijayakumar anticipates one more rate hike of 25bps in the next meet and a hold thereafter.
“The Fed always responds to incoming data. However, the current trend indicates the possibility of a rate cut only by the second quarter of the next year (Q2CY24),” said Vijayakumar.
Madhavi Arora, Lead Economist at Emkay Global Financial Services, has a similar view.
“We are not expecting any action from the Fed amid incipient signs of a cooling labour Market and demand-led inflation, but expect them to keep one more hike intact in the dot chart and sound cautious and data-dependent,” said Arora.
“The expectations about the Federal Reserve’s monetary policy decision in September 2023 are almost evenly split. We are in the camp which believes that the Federal Reserve will pause this time and there will be no further rate hikes in the US during the current cycle, barring unexpected resilience in growth and the continuation of higher-than-expected retail inflation,” said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.
“Early signs of a slowing economy, the broad trend of falling retail inflation in the US and the strong likelihood of a significant negative impact of the rate hikes so far on future growth, are factors which are likely to make US monetary policymakers hesitant to continue with rate hikes,” Hajra said.
Key things to be in focus
Amit Goel, Co-Founder & Chief Global Strategist at Pace 360 believes the change that may be made to the dot plot for 2023 and 2024 are more relevant.
(The Fed dot plot, as per britannica.com, is a chart that shows where each FOMC member thinks interest rates will be by the end of the current year, three consecutive years after, and the more ambiguous longer run. Each dot represents a member’s individual view.)
Goel pointed out that at the June meeting, the Fed dot plot pointed to one more rate hike from the current levels and also suggested that there will be four rate cuts by the end of 2024. The first-rate cut was projected to happen in May of 2024.
However, Goel observed that the recent developments indicate a shift in this trajectory.
“Swaps Contract linked to Fed decisions now reflect less than 100 basis points of cuts, down from well over 150 basis points as of early this year. We expect the Fed to now indicate the first rate cut by June 2024 and not more than three rate cuts by the end of 2024. The effective federal funds rate, currently at 5.33 per cent, is expected to fall to about 4.49 per cent by the end of 2024, aligning with these revised expectations,” said Goel.
Hajra said the market participants will closely monitor changes in the Fed’s monetary policy statement and the tone of the chairman’s post-policy press briefing.
However, Hajra believes the Federal Reserve, as a data-driven central bank, is unlikely to make firm predictions about the future path of both growth and inflation as the outlook of the global economy in general, and the US in particular, remain highly uncertain.
“Neither is the Fed likely to offer definitive guidance on the course of monetary policy nor should the market consider any statement made by the Fed about the future course of monetary policy as sacrosanct,” said Hajra.
How could the Fed interest rate decision impact the market?
The market might have discounted the possibility of a pause by the Fed in September. So, the market may not react to the move. However, the Fed Chair’s commentary on the inflation trajectory and growth will be closely observed by the markets.
“Investors will analyse the outcome and the accompanying comments for hints about the probable timing of the rate hike cycle and the Fed’s view on the job markets, inflation and economic growth,” said Deepak Jasani, Head of Retail Research, HDFC Securities.
Jasani said global markets, including India, are expecting the US Fed to maintain rates at their September 19-20 meet and hence if it comes true, by itself it may not impact their trajectory. However in case there is any surprise (positive or negative) in the Fed’s commentary, then it could have an impact on Indian markets, though less than that in other developed economies.
Vijayakumar pointed out that the markets have already discounted this expected scenario. The positive response of the US market and consequently other markets, too, is in response to the US economy’s soft landing scenario.
“Markets will remain stable so long as this soft landing scenario holds,” he said.
Hajra said the odds are almost evenly split between a 25-basis point hike and a pause by the Fed during the September 2023 policy. A Fed pause, particularly if accompanied by relatively dovish guidance on the future course of monetary policy measures, is thus likely to be interpreted positively by global financial markets, including Indian markets.
Even if the Fed attempts to dampen expectations of an early pivot, a pause will heighten such sentiments. Financial markets may start anticipating a soft and orderly cooling off of both growth and inflation in the United States. These factors are likely to boost financial market optimism even further, Hajra said.
G. Chokkalingam, Founder and Head of Research at Equinomics Research underscored that the focus of investors should be on their statements on intentions to hike rates at the cost of growth. However, he added that Indian investors’ focus should be on the oil price – whether it breaches $100.
“Any possible rise in oil price beyond $100 would cause much more damage than another 25 bps rate hikes by the US. It is worth noting that despite around 500 bps hike in benchmark rates by the US Fed the domestic markets have created a lifetime record in terms of jumps in benchmark indices. So, a pause or hike does not make much impact on domestic markets at this juncture,” said Chokkalingam.
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.
