The US Federal Reserve raised its interest rates by a quarter of a percentage point on the back of still elevated inflation to 5.25-5.5 percent range. This is the highest interest rate since 2001.
This is US Fed's 11th rate hike in its last 12 meetings. Further, the policy statement also left the door open to another increase in the next meeting. FOMC members voted unanimously to hike the overnight interest rate to a 22-year high to bring inflation down to the 2 percent target.
"The (Federal Open Market) Committee will continue to assess additional information and its implications for monetary policy," the Fed said. The FOMC next meets on September 19-20 and subsequently on October 31-November 1.
Powell said in the press conference that he does not expect the US central bank to lower interest rates this year and still expects the economy will come back into better balance without major damage.
"We’ll be comfortable cutting rates when we’re comfortable cutting rates, and that won’t be this year," Powell said at the press conference following the Fed's policy meeting.
On the back of the rate hike, Indian markets ended over half a percent lower on Thursday. The BSE Sensex shed 440 points or 0.66 percent to 66,267 while the Nifty50 also fell 118 points or 0.6 percent to 16,660.
Let's see what experts have to say about this latest rate hike by the US Fed and the possibility for more hikes. When will this cycle end? Here's what market analysts believe:
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
The US markets didn’t react to the expected rate action and message from the Fed. The message from the Fed chief’s press conference is that further rate actions will be data-dependent. So the markets will be keenly watching the jobs report and CPI numbers due before the September Fed meeting. As of now, there are no known negative triggers that can impact global equity markets.
Q1 FY 24 results are panning out mostly on expected lines with excellent performance from banks and weak guidance from the IT sector. Nifty has rallied around 5 percent in the last one month mainly on FII buying and sustaining strong inflows into domestic mutual funds. Institutional support is likely to continue.
Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS
The US Federal Reserve’s increase in interest rates by 25 bps was on expected lines, but more importantly, the commentary and press conference were largely neutral. Considering the massive rate hike cycle in place and inflation challenges reducing, more rate hikes are not needed at this juncture. Further rate hikes could be detrimental to economic growth prospects raising the chances of a hard landing. So, the interest rate cycle has largely peaked, but its impact will be seen in the forthcoming quarters. India is also placed in a similar manner, with rate hikes primarily done. There is a possibility of one more rate hike, but RBI’s stance is likely to be balanced.
Dhawal Ghanshyam Dhanani, Fund Manager, SAMCO Mutual Fund
Fed, resuming its most aggressive monetary tightening campaign in decades, unanimously decided to raise interest rates by a quarter-point, the highest since 2001. The lack of aberration in the policy statement definitely suggests FOMC to be in “When the Facts Change, I Change My Mind” mode. Though the current rate increase is in order to merely align the Fed fund rate with market rates, going ahead, odds are equally in favour of another rate hike in September and a decisive pause.
Global commodity prices have started to inch up again after a year of softening and this may influence Fed’s decision going forward. Powell refused to give any hints or signals regarding future direction, keeping decisions on a “meeting-by-meeting” basis. At the June meeting, policymakers conveyed their intention for two interest rate increases this year. However, it's noteworthy that market expectations are clearly leaning towards the likelihood of no rate hikes going ahead".
Subho Moulik, CEO, Appreciate, a fintech platform for savings and investments
After ten consecutive rate hikes and a pause in June, the Federal Reserve has now hiked rates again by 25 bps. As a result, the federal funds rate is now at its highest level in 22 years. But it looks like the economy is going to be okay. The US economy has been resilient despite high inflation and tightening monetary policy. The unemployment rate is near record lows in half of US states, and consumer confidence is at a two-year high. Moreover, stocks have been doing surprisingly well, with Wall Street defying the pressures of what has been the fastest hiking cycle in about 40 years.
Given these encouraging factors, economists now think a soft landing is more likely than the alternatives, which is one of the reasons the Fed doesn’t seem too worried about pushing rates up. Although inflation is gradually cooling, it still remains far above the Fed’s 2 percent target. The Fed’s rate hike, however, will force central banks around the world to also bump up interest rates to avoid currency depreciation risk, as the flow of capital to higher-yielding US assets might weaken their currencies.
Raghvendra Nath, Managing Director, Ladderup Wealth Management
After a pause in June FED resumed the rate hike with the FED fund’s rate now at 5.25-5.50 percent, its highest level in the last 22 years. Markets had already anticipated this decision. The FED chief has indicated that further actions would be dependent on various reports expected before the next FED meeting. The key events to look out for in the market and FED would be two job reports and two reports on consumer price inflation. Swap market pricing indicates a 50 percent probability of another rate hike before the FED’s tightening cycle ends. A sustained easing in price pressures over the coming months would be necessary for the FED to put a stop to this tightening.
