The US Federal Reserve hiked interest rate again by 25 basis points (bps) on Wednesday, as expected, in a move to cool down the persistently high inflation. This is the 10th hike in a row, pushing the rates up to 5-5.25 percent, the highest level in 16 years. The Fed is aiming to bring inflation under 2 percent. Despite the repeated rate hike, inflation continues to remain on the higher end. In March, US inflation slowed to 5 percent but was still well above the Fed's target.
Federal Reserve chair Jerome Powell said that the Fed still views inflation as too high, and said it was too soon to say the rate hike cycle is over. The central bank also noted that it seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. "In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5 to 5-1/4 percent," it said.
In a statement after its latest policy meeting, the Fed removed a sentence from its previous statement that had said “some additional” rate hikes might be needed. It replaced it with language that said it will consider a range of factors in “determining the extent” to which future hikes might be needed.
Experts on Fed rate hike
This 25 bps rate hike is in line with what the Street expected. But going ahead, do experts see more rate hikes? Let's Find out:
Suman Bannerjee, CIO, Hedonova
"The 25 basis point hike is welcome, even on the backdrop of the US banking crisis. Reading the FOMC statement it is clear that the Fed is laser-focused on taming inflation. This is a great approach since high inflation can affect an export-oriented economy like the US in multiple ways, such as weakening of the dollar, reduction of exports, or increase in the balance of payments.
Will there be another rate hike? Hard to say. The meeting did not include a notation that “some additional policy firming may be appropriate,” which was included in its prior release. That omission leaves open the possibility for an upcoming pause in rate hikes. The banking crisis will mostly be mitigated by the Treasury instead of the Fed. The Treasury will mostly purchase long-dated bonds from banks or provide financing against them," said the expert.
Sunil Damania, Chief Investment Officer, MarketsMojo
Meanwhile, Sunil Damania said that he would have preferred that the Federal Reserve does not raise interest rates, given the current state of the banking industry in the US. PacWest Bank is currently facing financial difficulties and may follow the same path as SVB and First Republic. The recent rate hike is likely to complicate the situation, noted Damania.
In addition, the US may face challenges in its commercial real estate market, which is another potential danger.
"It is our belief that this will be the final rate hike from the Fed this year, and there is a high probability that the Fed will begin reducing interest rates in the second half of 2023. The US banking industry's current state is far from satisfactory and could pose problems for the global equity market," he forecasted.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services
Vijayakumar stated that from the market perspective, more important than the expected dovish rate hike of 25 bps by the Fed is the Fed chief’s comment that “the case of avoiding a recession is more likely than having a recession.” He expects markets to remain resilient with limited volatility.
He further pointed out that the possibility of a soft landing for the US economy is positive for the IT segment which has been on the back foot on concerns of poor orders from the US.
The strength of the rupee and the continued buying by FIIs will impart strength to the market. High-frequency indicators in India reflect a resilient economy with improving earnings prospects. The sharp decline in crude is an extra bonus to the macroeconomy and benign for segments like paints, adhesives and tyres, he added.
Apurva Sheth, Head of Markets Perspective & Research, SAMCO Securities
Sheth believes that post this latest hike, the gap between interest rates and inflation has narrowed down to zero and the effects of all the rate hikes are yet to trickle down. Hence, inflation could cool down further, requiring either limited or no intervention by Fed, he noted.
Along with this, the banking crisis has deepened with First Republic Bank's failure. Many of the smaller regional banks like PacWest, Western Alliance Bank and Metropolitan Bank were down between 20-60 percent after the Fed announcement signaling higher interest rates are already stressing them. The Fed wouldn't want to risk financial stability just when inflation is already headed lower, said the expert.
Hemang Jani, Head - Equity Strategy, Broking & Distribution, MOFSL
Jani also noted that this Fed hike seems like last, but rate cuts could happen later only if there is significant deterioration in economic activity or inflation cools off. This led to sell-off in US markets but may not have a material impact on India in the short run as RBI has paused the rate hikes and there is weakness in the crude oil price, he observed.
