Fed's rate-hike campaign may continue; what should investors do?

Updated: 27 Mar 2023, 11:05 AM IST

While a pause is possible in the near future, a cut in interest rates is highly improbable. It appears the market is not going to get comfort from the Fed this year.

Jerome Powell, chairman of the US Federal Reserve. Photographer: Al Drago/Bloomberg

Amid the banking crisis after the collapse of Silicon Valley Bank (SVB), hopes grew stronger that the US Fed will take a pause on rate hikes.

The hope was dashed as the Fed raised rate by 25 basis points (bps), signalling that bringing inflation down remains its top priority.

It was Fed's ninth consecutive rate hike and even though there were subtle hints that it may think about a pause due to intensifying stress in the financial system, it is expected that the US central bank will remain data-dependent and its move on rate hikes will depend on upcoming inflation prints and the performance of the banking system.

While a pause is possible in the near future, a cut in interest rates is highly improbable. It appears the market is not going to get comfort from the Fed this year.

"The Fed raised rates by 25 bps but did not clarify its future course of action in terms of rate hike strategy. It appears the Fed is unsure how the SVB event may affect the US banking sector," said Sunil Damania, Chief Investment Officer, MarketsMojo.

"I think the Fed would look for financial system flaws and then determine what to do. One thing is certain, the Fed chairman has made it obvious that they do not anticipate a rate cut in 2023," said Damania.

The ifs and buts about rate hikes

Fed Chair Jerome Powell has reiterated that the fight against inflation is not over yet. However, he also hinted that the current banking crisis might cause its rate-hike campaign to end sooner.

As YES Bank highlighted in a note, in February 2023, CPI print came at 6 percent year-on-year (YoY), down from the peak of 9.1 percent YoY in June 2022, but still well above the Fed's target of 2 percent.

"Though price stability continues to be the major focus area for the Fed, there has been a change in the forward guidance language," YES Bank said.

"Fed Chair pointed out that the tighter credit condition could act as an alternative to rate hikes that would help in bringing down inflation. This probably provides a bullish hint to the market that a pause in the hiking cycle is near," said YES Bank.

But investors should not start anticipating a pause in rate hikes.

The tight labour market continues to remain a concern for the Fed due to which at least one hike looks possible.

"There is a strong possibility of at least one more hike despite the current banking crisis. It cannot be said whether the Fed will take a pause after that as it will depend on upcoming inflation prints. Fed is expected to remain data-dependent for rate hikes," Harsha Upadhyaya, President and Chief Investment Officer – Equity at Kotak Mahindra Asset Management Company, told MintGenie.

Sunil Jain, Head of Equity Research - Retail at Nirmal Bang, believes there may be one or two more increases over the next few meetings, possibly ranging from 0.5 percent to 0.75 percent.

"The Fed may take a break from further rate hikes after that, as the rate of inflation is likely to remain high, with projections of around 4 percent in the calendar year 2023," said Jain.

"This may lead to a period of stagnation until there are indications that inflation is beginning to decline towards the target of 2 percent. Only then is it likely that the Federal Reserve will consider reducing interest rates," said Jain.

What should investors do?

Do not try to time the market. It is futile to predict the macroeconomic factors. Fed's move will depend on how inflation and banking turmoil unfold in the future and how it reads them.

The current market is not suitable for short-term bets so think long-term and bet on quality stocks with sound fundamentals for the long term.

"For retail investors, it is advisable to take a long-term investment perspective in the current market scenario. Some quality stocks with reasonable valuations can provide good investment opportunities, given the current market conditions," said Jain.

"However, there are still some stocks whose valuations remain higher than the pre-COVID level, and these may not be the best investment choices at present. Instead, investors should focus on stocks with valuations that have come down to pre-COVID or lower levels, as these stocks may offer reasonable returns over the next two to three years. By selecting quality stocks with favourable valuations, investors can position themselves for potential growth while also managing risk," said Jain.

Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.


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First Published: 27 Mar 2023, 11:03 AM IST