With the US Federal Reserve expected to leave benchmark interest rates unchanged on Wednesday, November 1, it’s unlikely that the domestic equity market will experience significant reactions to this event.
A majority of experts believe the Fed will maintain a pause on interest rates for the second consecutive time after the conclusion of the Federal Open Market Committee’s (FOMC) two-day meeting on Wednesday.
In its previous policy meeting on September 20, the US central bank left the benchmark interest rates unchanged, with a range of 5.25 per cent to 5.50 per cent.
While the market appears to have factored in a pause in rate hikes, investors and economists will seek cues on whether the Fed will opt for interest rate reductions in the near term or maintain a more hawkish stance by signalling further rate hikes.
Also Read: US Fed policy outcome: 6 key things that will be in the Fed’s mind before making a rate decision today
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No hikes; no cuts
Barring a few, experts do not expect the Fed to surprise the market by raising or cutting rates as the US economy remains strong and inflation remains above the Fed’s 2 per cent target.
The gross domestic product (GDP) of the US expanded at an annualised rate of 4.9 per cent in the September quarter, the US Bureau of Economic Analysis (BEA) first estimate showed on Thursday, October 6.
Meanwhile, the US labour costs increased significantly in the September quarter amid strong wage growth. According to a Reuters report, quoting the Labor Department’s Bureau of Labor Statistics data, the Employment Cost Index (ECI), the broadest measure of labour costs, rose 1.1 per cent last quarter after increasing 1 per cent in the April-June period.
On the front of inflation, the personal consumption expenditures price index rose 3.4 per cent in September and the core PCE price index rose 3.7 per cent, according to a Reuters report.
Resilient economic growth is a factor which can give the Fed comfort in keeping interest rates high for some time.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services also believes the US Fed is most likely to hold rates in this meeting but the message from the Fed chief Powell will be hawkish since the economy is surprisingly resilient with a 4.9 per cent growth in Q3 GDP.
The high bond yields in the US also indicate that the market expects the higher for longer rate regime to continue for some time, said Vijayakumar.
Deepak Jasani, Head of Retail Research at HDFC Securities expects the US Fed to keep interest rates steady at the current 22-year high level on Wednesday.
Jasani said investors will analyse the outcome and the accompanying signals for hints about the probable timing of the reversal of the rate hike cycle and the Fed’s view on the job markets, inflation and economic growth. Investors hope that the US Fed will not sound hawkish about interest rates remaining higher for longer as in the previous meeting.
G. Chokkalingam, Founder and Head of Research at Equinomics Research believes that the US Fed is likely to keep benchmark interest rates steady and monitor the impact of cumulative rate hikes already executed on the economy and corporate world.
Nishit Master, Portfolio Manager at Axis Securities PMS expects the US Fed to stay put and not change rates in this FOMC meeting.
“We expect the US Fed Chairman to reiterate his commitment to fighting inflation and indicate that though inflation has started moderating, the recent geopolitical tensions have increased risk on the upside for inflation. This could bring into play a December rate hike, especially if crude oil prices spike further,” said Master.
Trivesh D, COO of Tradejini said the Federal Reserve is poised to maintain its resolute hawkish stance, showing no intention of reducing its interest rates, which are currently at a 22-year high, as part of its strategy to combat inflation.
“The Fed is expected to maintain its current short-term interest rate, providing perhaps the most explicit signal to date that it is approaching the conclusion of its rate-hiking campaign. This approach aims to control inflation while monitoring the broader economic landscape,” said Trivesh.
Also Read: US Fed preview: Rate hike or a pause? Experts weigh in
How will the Fed’s decision impact the Indian stock market?
Stock market experts anticipate a muted response to the US Federal Reserve’s decision.
Vijayakumar said since no surprise is expected from the Fed meeting outcome, the market is unlikely to be impacted. But the high bond yields will weigh on markets and foreign institutional investors (FIIs) can be expected to continue selling. The consequent weakness in sectors like financials where the FIIs hold a major segment of their holding will provide buying opportunities for long-term investors, Vijayakumar said.
Jasani said global markets, including India, are expecting the US Fed to maintain rates and hence if it comes true, by itself it may not impact their trajectory. However, in case there is any surprise (positive or negative) in the Fed’s commentary, then it could have an impact on Indian markets, though less than that in other developed economies.
Master of Axis Securities PMS underscored that the no rate hike scenario for this FOMC meeting means that the rate decision itself is a non-event for Indian stock markets, while the tone of the US Fed Chairman for future courses of action will determine the direction for global equity markets.
Trivesh said the policy decision is unlikely to trigger major repercussions in the Indian stock market, given that market participants have already integrated the effects of these record interest rates.
Chokkalingam also said the domestic equity would remain unaffected by the US Fed event. However, he said because of the resilient US economy and decent corporate earnings, there is little chance of a rate hike which could trigger a correction in the market.
“There is a remote possibility of one more small hike this time. The US economy remains robust, employment levels are strong, corporate earnings remain decent as the corporate world sees low defaults and their balance sheets are quite strong. In such a scenario, there is a remote chance of a small rate hike this time. If it happens our markets could correct up to 2 per cent instantaneously,” said Chokkalingam.
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