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Below Reactions on December Fed Policy By Dr Vikas Gupta, CEO and Chief Investment Strategist, OmniScience Capital

The US Fed did the expected with a 50-bps point increase bringing the current rate to nearly 4,4% (4.25% to 4.5%). The new dot plot shows that the peak interest rate now is expected to be around 5.1% with a small chance of going up to 5.6%. The Fed is expecting to keep rates elevated for a couple of years until 2025, thus spooking the markets. The goods market is in control because of it is driven by supply chain constraints and those have eased. It is likely that the good markets will be in deflation. The housing market has also cooled, though the rents are likely to take time to cool down. The wage inflation is not yet cooled, and this is the factor that the Fed is targeting now with a longer duration elevated interest rate expectation.

However, another way to look at the tight labour market is the underlying strength of the economy. This means that the revenue and earnings growth of companies is likely to remain strong. Except for a small rationalization in the work force in the technology companies, the remaining sectors are not showing any signs of layoffs. Ironically, the tech companies remain on path for the strongest growth rates compared to most other sectors.

The Fed confirms that the economy, in 2023, is likely to continue growing, albeit at a slower pace, the unemployment rate to peak at 4.6% and the PCE inflation to reach 3.1% and continue falling All of these are very positive indicators. Once Mr. Market digests this, the markets are likely to respond quite positively since there is no new negative information that has come in unless Mr. Market was expecting that the Fed was going to start reversing rates in the next meeting. For long-term investors, the December-end tax-loss harvesting would be a great time to deploy capital into the equities markets. Some might consider investing in long-duration treasuries to “lock-in” the elevated yields and also a large capital gain when the interest rates start reversing. However, in our opinion, the equities provide a higher return potential from interest reversals from peak compared to long-duration bonds.

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