17-04-2024 02:51 PM | Source: Emkay Global Financial Services
Perspective on US Fed by Ms. Madhavi Arora, Lead Economist, Emkay Global Financial Services

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Below the Perspective on US Fed by Ms. Madhavi Arora, Lead Economist, Emkay Global Financial Service


Here comes another one, this time from the Chief & We are not surprised with this gracklish tone!  The way Fed wud confuse in guiding the markets (esp thru this year) is exactly what we have been arguing since 2022 and formally removed any rate cuts forecasts in early Mar'24 (report below)

* This is something that had immediately rubbed off to our RBI rate cut forecast as well in 2024, since we have long argued that RBI has no macro stability merit in preceding the Fed, esp. when it has its own problems of plenty back home on policy management in the coming months.

Even with no cut by the RBI this year, the easier banking liquidity conditions in coming months would still keep financial conditions easy despite no policy action by the RBI. And either FX or FI would be hammered as RBI tries managing the trilemma and tries flowing with the global winds.

* Coming back to the central banks reaction function, we have been questioning if it is time to reassess our faith in central banks’ guidance post-pandemic, and take a fresh look at the underlying trends that suggest a constructive growth outlook, sticky inflation, and limited DM easing.

* We had been suggesting clients that it is worthy to consider fighting the Fed, which has guided us to a path of three cuts in 2024/2025 in March and now is backtracking in less than a month!!.

* We were never on the massive rate cut camp and have been arguing against the noises of peakflation and rate cuts since 2022, and the world is now converging to our view of a case of ‘No Fed cuts’ in 2024, as they struggle to get to the last mile of disinflation.

* The possible error of judgement by DM policymakers on inflation transience and permanence post-Covid, has its roots in the fact that macro models are based on past-decadal trends, while the new structural shifts are yet to be incorporated. Its time these old models see a natural death or a massive revamp!

* It simply makes us feel that believing the Fed/DM on face value (whose pivots have been noisier post-Covid) could yield investment strategy errors.

Fed has be wrong in the past periods post covid, it may not be too far for the same if it does an early pivot cut!

* *Reflation trade is back!**

* That said, the reflation trade is on again. Technically one should look for cyclical and inflation-aware asset classes to outperform.

This may include energy, productive metals, precious metals, and industrials etc. Some of it is already playing out.

* Amid still-inverted Yield curve and sticky inflation levels ahead n possible volatility, duration on the curve may not be the best place to take risks either.

* Going ahead, apart from other factors, we see global trends, incl. supply chain re-globalization,  digitization, and the energy transition to point to high capital investment.

Thus a higher inflationary impulse in the coming years may not be ruled out. Some structural asset allocation to inflation resilience makes sense.

Read more:

(1) Is it time to fight the Fed?


(2) RBI MPC: What to expect when you’re expecting a Bull Steepening 



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