Fed policy preview: What you should know as D-St braces for big rate hike

New Delhi: The US Federal Reserve is set to kick start its two-day policy review later in the day. Thus, all eyes are on the quantum of the rate hike the US central bank may go with, this time.

A 75 basis point rate hike is what the consensus was looking at a few days ago, but given the inflationary pressure in the world’s largest economy, a 100 basis points rate hike cannot be ruled out.

Analysts said the Fed statement may acknowledge waning of the growth momentum, but Fed Chair Jerome Powell may signal the central bank’s focus on inflation during the press conference. He may hint at additional rate increases, analysts feared.

The recent data has shown signs of an economic slowdown in the US while inflation there remained stubbornly high, with claims for jobless benefits rising to its highest in eight months last week.

Market participants, at this point in time, have discounted a 75 basis points rate hike, said Gaurang Somaiya, Forex & Bullion Analyst,

, who added that a hawkish stance and a 100 basis points rate hike could strengthen the dollar against its major currencies.

Nomura is expecting a 100 bp hike from the Fed at the July meeting and a surge in monthly core PCE inflation to 0.6 per cent month-on-month in June.

This brokerage expects a recession in the US to start in the December quarter, but increasingly entrenched inflation will likely result in continued Fed tightening through February, before cuts in the September quarter of 2023, it suggested.

“Incoming data suggests inflation has become more entrenched relative to the Fed’s expectations. As a result, we maintain our expectation for the Fed to raise rates by 100 bps in July, up from the 75 bps hike in June. The updated FOMC statement will likely acknowledge waning growth momentum. However, we believe Chair Powell will remain focused on inflation during the press conference and signal that additional rate increases are likely,” Nomura said.

Aishvarya Dadheech, Fund Manager at Ambit Asset Management, said the inflation of almost nine per cent in the US is far from the Fed’s target inflation of two per cent, and hence, at least 150 bps of a rate hike in this cycle (July-August) cannot be ruled out, effectively ending pandemic era support for the US economy.

“Indeed, this initiative to control inflation will inflict more pain on the US economy and its growth. An aggressive rate hike or a very hawkish commentary for the remaining leg of the rate hike cycle will make the market jittery. The Fed will prioritise inflation over growth,” Dadheech said.

“The differential between the effective Fed Fund rate (1.55 per cent) and 10-year yield in the US (2.8 per cent) will be covered with at least a 140- 150 bps rate hike in this calendar year. The Fed will possibly go slow post that, once they have better visibility about any adverse impact on growth,” he added.

Naveen Kulkarni, Chief Investment Officer at Axis Securities said the market is seeing a 75 bps hike from the US Fed in July, a 50 bps hike in September followed by a 25 bps hike each in November and December to take the Feds Fund rate to 3.25 per cent by the year-end.

“These rate hikes are already priced in by the market and any incremental increase this year, apart from the ones mentioned, might be taken negatively by the markets. If the US economy slows down significantly or if commodity prices fall further, there is a possibility that these planned interest rate hikes might not materialise, especially the ones in November and December,” said he.

Later this week on Thursday, the market participants will be keenly keeping an eye on the advanced reading of the second quarter of the US GDP and a negative number could reaffirm the expectation of a slowdown in the US economy. GDP has contracted in the last quarter and another quarter of contraction could put the economy on the brink of recession, Somaiya said.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)

Roy Walsh

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