In its May 4 meeting, Fed had raised short-term interest rates by 50 basis points to a target range between 0.75 per cent and 1 per cent. The increase followed a 25 basis point hike in March 2022.
NEW DELHI: As the US Fed concludes the two-day policy review later today, analysts on Dalal Street believe the debate would no longer be about a 50 basis points or a 75 basis points rate hike, but about how high the policy terminal rate needs to be by mid-2023 to contain the Fed’s conundrums.
The terminal rate is defined as the expected end point for rate hikes.
In September 2021, it stood at 1.8 per cent. It increased to 2.1 per cent in December and 2.8 per cent in March 2022.
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In its May 4 meeting, Fed had raised short-term interest rates by 50 basis points to a target range between 0.75 per cent and 1 per cent. The increase followed a 25 basis point hike in March 2022. Here’s a table showing the past real terminal rates of key hiking cycles.
Emkay Global, in a detailed note, said the pace and quantum of moves towards the terminal rate will possibly decide the fate of the so-called ‘landing’, be it a hard one, that is recession, or a soft one – more like a mid-cycle slump.
Nomura India said considering the message from a wide array of FOMC participants going into the blackout period about the importance of monthly inflation, the latest data reinforce its hawkish Fed outlook, including an above-consensus 3.75-4 per cent terminal rate forecast (in June 2023).
“Long-term consumer inflation expectations are increasingly unanchored,” it said.
This brokerage is expecting an upside risk to the June 2022 dots and its near-term Fed outlook with the potential for a 75 bps hike in July or 50 bp hikes for the rest of 2022.
Nomura said that Fridays’ hotter-than-expected month-on-month core CPI print in the US means that the ‘peak-inflation’ narrative for now is delayed with the Fed likely to remain on the hawkish path until monthly inflation shows clear signs of sequential slowing. Chair Powell is likely signalling a fourth 50 bp hike in September, it said.
Emkay said while there may be more pain in store for the Fed from the headline inflation numbers going forward, core inflation could be near its peak on a YoY basis (now 6 per cent).
“However, sequential gains are still running thrice as fast (0.6 per cent MoM) against the healthy pace of 0.2 per cent that the Fed intends to see. This makes us believe that the supposedly hawkish Fed so far has, at least, not been aiming to crash growth meaningfully, if one sees their median forecasts for terminal rates and core inflation, and thereby the implied real policy rate,” Emkay said.
Likely Market Impact
Investment Guru Jim Rogers infact believes that the market would perceive a 75 basis points rate hike, if it happens, good news in the immediate run because the market would assume the worst is over.
“The worst would not be over, but the market might perceive that for a while because there is so much pessimism right now,” Rogers told ET NOW.
In the short-term, Emkay said while the money markets may have largely factored all this in, the pain will likely linger for equity and credit markets, especially as the sharp growth and earnings revisions, due to possible stagflation/recession, bake into valuations when rates reach these higher levels in early 2023.
“Our study also shows equities and credit struggle historically well after rates peak. Thus, investors may need to brace for occasional bear market rallies in the coming months,” it said.
( Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)