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Comment on U. S. Fed Announcement By Pankaj Pathak, Fund Manager, Quantum Mutual Fund

The 75-basis points rate hike was widely expected and priced in the markets. The Fed chairman made it abundantly clear that Inflation remains the Fed’s top concern; so, rate hikes would continue. There was an indication that it can hike by another 75 basis points in the next FOMC meeting in September.

Markets took comfort from the fact that the Fed’s statement was more balanced this time. The fact that the FED’s statement started with an acknowledgement of slowing growth, indicates that the fed is turning increasingly attentive to growth risks as well. This resurrected the ‘FED PUT’ – an expectation that the FED will stop and then dial back rate hikes if the economy slows down materially.

Global markets are currently more focused on recession than inflation. Thus, market pricing is based on – the more they hike now, the more they will have to cut later. Every bad data on the economy would be a positive for the bond markets.     

Recession fear in the US and in other parts of the world has been somewhat positive for India. The sharp drop in commodity prices and a pickup in monsoon should ease some pressure from the RBI. It may, nonetheless, hike the repo rate by another 50 basis points just to withdraw the excess monetary accommodation provided during the pandemic. We expect the RBI’s commentary to soften a bit with an acknowledgement that inflation risks are receding.    

From the bond market’s perspective, much of this is already priced in as bond yields have fallen by over 25 basis points from their recent peak. Indian bond yields will likely trade in a tight range in the coming months. From the monetary policy, the bond market will look for indication of the total quantum of rate hikes in this cycle.

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