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Below View On Fed Policy comments-by Anitha Rangan, Economist, Equirus

“Fed policy hike came in on expected lines of 50 bp hike. Notably, the Fed has revised its terminal rate estimates to 5.1% (median) from 4.6% in Sept, which is a 50 bp hike. Alongside, the Fed has also lowered its growth forecast while raising its inflation forecast for 2023. In the post policy conference, Powell emphasised that the Fed does have a long way to go. While inflation data suggests that inflation is trending lower, it is still way above the 2% target, particularly emphasising that the core inflation is sticky. However, Powell also stated that the pace of policy hikes will be lower but emphasised that the pace does not matter anymore, and it is the terminal rate that matters.

US treasuries were largely flat, equities declined while dollar gained marginally post policy on hawkish comments from Powell. While Powell dismissed the option of rate cut, surprisingly the market is poised for rate cut in mid of 2023 with terminal rate expectations below 5%.

Indian markets have also opened negative following US markets, following the expectations of recession / slowdown and more hawkish comments from Fed. However, this is after a reasonable rally post US and India inflation data. Markets have not completely given up the gains. While there is hope of softer Fed action, the risk is now shifting to “hard landing”. For India and the RBI, there is the cushion of domestic economy holding with the external headwinds. RBI policy raised 35 bp this time, but if inflation comes below 6% for another time, there is a larger scope for pause”

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