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FED leveraging on strong job market to go for soft landing

FOMC raised interest rates by 75 bps on expected lines taking its benchmark rate to a range of 2.25% to 2.5%. Further to the announcement, FED gave the future interest rate guidance in the range of 3% to 3.5%. Hike of 75 bps was already discounted by markets but it’s the guidance which cheered US markets which closed higher; DOW (+1.37%), NASDAQ (+4.26%).

FED Chairman Jerome Powell emphasized the significance of price stability for sustainable economic growth. He indicated the FED is targeting ‘softlanding’ of the economy in order to bring inflation under control. Strong labor market with an unemployment rate near 50 years low gave FED confidence in hiking interest rates. He also stressed that the US is not in a recession and mentioned there have been many instances when growth was negative for a few quarters but a strong job market ensured that the economy sailed through such a patch. Strong labor market would ensure underlying demand remains. The FED is trying to control inflation by slowing down the economy without damaging the labor market significantly.

Interest rate guidance of 3% to 3.5% leaves scope for either one unusually large increase in September policy meeting or a step by step increase of the same magnitude which suggests this upward rate cycle may not last for long. This reading was validated by US10Yr bond yield which didn’t budge from levels of 2.79% and dollar index too cooling off from 107 levels post the policy announcement.

FED through its commentary has made markets believe that this interest rate upcycle may not last long contrary to what was estimated before. This may have positive implications on equities globally..

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