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? The FOMC raised its policy rate by 75bp for the third consecutive time, taking it to 3- 3.25% (or a central rate of 3.125%), as expected, at its Sep’22 meeting. More importantly, FOMC members’ economic projections had a median forecast for the Fed Funds rate of 4.4% by end-2022, implying further rate hikes by 125bp at its subsequent two meetings this year. This is an implicit acknowledgement of its policy error, which the FOMC now seeks to correct by front-end loading its rate hikes by a total of 425bp in a 9-month period (Mar-Dec’22). We expect the Fed Funds rate to peak at 5% in Mar’23; only then will core PCE inflation likely moderate toward 2% YoY.

? The far more aggressive monetary tightening by the US will likely bring forward the expected US recession to Q2CY23 (two quarters ahead of our previous forecast) with the US unemployment rate rising to 4.8% by Q3CY23 (implying the recession will ‘feel’ less severe than its predecessors). The steep inversion of the US 10yr-2yr yield curve (to -0.51% on 21st Sep’22) suggests that the recession could be longer-lasting, with scant scope for monetary support, given that core PCE inflation is also not likely to moderate below 2% YoY before Q4CY23.

? The other consequence will be to prolong the period of USD strength. With CNY depreciating 3.4% against the USD over the past month (and other major currencies in free fall against it), INR too will likely depreciate toward INRs81/USD over the next month. However, India’s goods exports to the US have steadily gained US market share over the past 15 years, rising from 1.1% in the year to Jul’07 to 2.7% in the year to Jul’22. These gains will persist, mitigating the impact on India’s export growth amid the US recession. More importantly, the key driver of India’s economic recovery will be investment spending (rather than exports) in H2FY23 and FY24, and India’s investment spending will continue to gain momentum as the longer-term prospects of the economy stay bright.

The US Federal Open Market Committee (FOMC) raised its policy rate by 75bp to a central rate of 3.125% (officially targeted at 3-3.25%), as expected, at its meeting on 21st Sep’22. The vote was unanimous. Apart from minor changes in the first sentence (saying recent indicators “point to modest growth in spending and production”), the statement was identical to the one in Jul’22, emphasising that “the Committee is strongly committed to returning inflation to its 2 percent objective”, including its schedule of quantitative tightening (US$95bn monthly from this month). Chairman Jay Powell made it clear that, regardless of how much the economy softened, the FOMC would keep raising interest rates until its 2% (core PCE) inflation target was within reach. As chart 1 shows, core PCE inflation was more than double the Fed’s 2% target – at 4.6% YoY in Jul’22 (the Aug’22 figure will be released on 30th Sep’22), while its closest cousin, core CPI inflation, surged to 6.3% YoY in Aug’22.

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