Fed policy preview: Jerome Powell has complicated job at hand today; don’t expect a straight answer
US Federal Reserve looks set to announce a 25 basis points rate hike in the next couple of hours, following a 50 basis points rate hike by ECB last week. The policy outcome and, more so, commentary on the US banking sector would matter a lot to stock investors in India, as the recent collapse in a few banks there were caused by liquidity issues rather than asset quality. A hike in interest rate could intensify pain in the US banking sector, investors fear.
Things are more complicated for the Fed as hikes are seen as a key part of regional banks’ problems, ING Bank said in a note.
“Markets are again vastly divided, debating if the Fed will finally pivot, especially as concerns about financial contagion persist. We maintain the Fed will go ahead with a 25 bps hike, with enough dispersion in the dot plot. Powell will likely distinguish between the inflation fight and supporting financial stability via regulatory tools, in the absence of any systemic event,” said Madhavi Arora Lead – Economist at Emkay Global.
The collapse of US and European banks, the biggest since 2008 crisis, has jolted stock investor sentiment globally and while central banks globally were quick to control the situation, tightening of liquidity is all likely. Investors are worried that such a situation would trigger a hard landing and recession in the developed world. Later today, investors would wish to know how the US central bank is looking to manage inflation and address emerging concerns on financial stability together
Mini-banking crisis
Craig Erlam, Senior Market Analyst for UK & EMEA at OANDA said every day that passes without drama is one closer to the point at which investors can put the mini-banking crisis behind them.
Erlam said the prevailing period of calm will allow Fed to continue hiking rate by 25 basis points without much controversy.
“The question is whether it will adopt a similar position to its counterpart in Europe and refrain from commenting directly on future moves or sending any strong signals. Unfortunately, it can’t entirely avoid offering a view on the outlook as it releases new economic projections including the dot plot, displaying policymakers’ views on where rates will go,” Erlam said.
Dodging future guidance
Erlam suspected that the Fed could caveat that with a statement saying those forecasts were made on the basis of data collected prior to the turmoil of the last couple of weeks.
“Still, it may prove too hard a topic to dodge. Perhaps the caveat will instead be that forecasts are based on the assumption of risks being contained but even that isn’t clear cut,” it said.
The FOMC might reckon that speed kills and contagions are difficult to manage, Arora said, adding that forward guidance could be hazy despite a likely unchanged 2023 median rate.
For now, the domestic market is factoring in a 25 bps rate hike by the Fed. An in-line and less hawkish policy stance will attract the bulls, said Vinod Nair, Head of Research at Geojit Financial Services.
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