US Fed Keeps Key Rates Unchanged Despite Elevated Inflation

The Federal Open Market Committee (FOMC), which was headed by Federal Reserve Chairman Jerome Powell, decided to halt its aggressive pace of interest rate hikes on Wednesday. The Federal Reserve has raised interest rates 10 times since March 2022 in an effort to combat inflation, which is still above its long-term target of 2% but has come down to last 40-years high. The Fed committee decided to hold its benchmark lending rate between 5.0 percent and 5.25 percent after 10 straight increases since March 2022.

According to the US Fed, unemployment is projected to hover around 4.1% in the fourth quarter as opposed to the 4.5% estimated in March. In May, the official rate of unemployment was 3.7%. In light of the fact that inflation is still high, the Fed is likely to decide to raise interest rates again this year in an effort to eventually reduce it to 2%. According to Powell, the consensus projection for US GDP growth in 2023 has been lifted to 1% from 0.4 percent in March.

Gold loses ground after the Fed hints at more rate hikes At 1903 GMT, the spot price of gold was up 0.3% at $1,949.89 per ounce. At $1,968.9, US gold futures closed 0.5% higher. Contrarily, crude oil prices decline as the Federal Reserve maintains its aggressive stance while leaving interest rates unchanged. While U.S. West Texas Intermediate (WTI) crude wrapped up $1.15, or 1.7%, lower at $68.27, Brent crude futures ended at $1.09, or 1.5%, lower at $73.20 a barrel. Despite the OPEC+ reduction, oil prices have remained stable due to declining industrial and business optimism in May from China and the Eurozone as well as a spike in Russia's export share.

Commenting on the Fed's rate pause decision, Milan Sharma, Founder, 35North Ventures said "Policy is in line with the expectation, and the Fed has paused the rate hike for now. The Fed will wait for additional information and see the effect of previous hikes before taking any new course. In my opinion, this is a temporary pause, and a lot depends on the US inflation going forward, which I believe only time can tell. Overall, the policy is on expected lines without any clear guidance going forward."

Nishit Master, Portfolio Manager, Axis Securities said "The US Fed has maintained interest rates as expected but the dot plot used by the Fed to signal future interest rates imply further two hikes in 2023. We believe this is unlikely, unless commodity prices including crude oil move up significantly. We believe this is more or less the end of increasing rate cycle by the US and future market movements globally will be determined by economic growth, corporate earnings, and financial stability in the developed world."

Apurva Sheth, Head of Market Perspectives & Research Samco Securities said "The US Fed in its latest meeting decided to pause its rate hike campaign. However, their hawkish stance despite cooling inflation surprised the markets. Only two of the 18 member FOMC committee members expect rates to stay here in 2023. Others expect the rates go higher in 2023. The hawkish stance pushed the US 10 year bond yields and the US Dollar higher while Gold and Dow Jones cooled off. We believe that chances of further rate hikes in 2023 are slim. US Inflation at 4% is already placed below the US interest rates of 5.25%. Inflation is clearly on its way down and Fed won't have to tinkle with rates unless there is a nasty surprise on the inflation front."

Sonam Srivastava- Founder at Wright Research said "The U.S. Federal Reserve's decision to pause rate hikes, coupled with a hawkish stance, could have mixed effects on Indian markets and Foreign Institutional Investor (FII) flows. In the short term, low U.S. interest rates may drive more FIIs towards high-yielding markets like India, potentially fueling the ongoing market rally, particularly in small and mid-cap stocks. The pause in rate hikes could also weaken the U.S. dollar, making Indian assets more attractive. However, the Fed's hawkish stance suggests potential future rate hikes, which could reverse FII flows if the U.S. assets become more attractive. The hawkish stance could also impact investor risk appetite, potentially affecting FII flows. The actual impact will depend on various factors, including global economic conditions, future Fed decisions, and investor sentiment."

Divam Sharma - Founder at Green Portfolio PMS said "With the median expectation of a funds rate of 5.6% by the end of 2023 and almost a 71% chance of a US recession by May 24, we could expect some turbulence over the coming months. However not as aggressive as in May, the trend of FPI inflows should continue to support markets. We have run up significantly since April, and any 5-10% correction in the broader markets should be used as an opportunity to allocate funds to Indian equities."

Sandeep Bagla, CEO Trust Mutual Funds view regarding the US FED Rates

"Preparing for the worst, hoping for things to improve.

US Fed skips a hike, cites strong labour markets, worries about stubborn inflation, warns of further rate hikes.

Points to ponder

- long term inflation target at 2% but corePCE projection hiked to 3.9%
- most Fed members expect 1-4 rate hikes
- the street was expecting rate cuts soon

There is standoff between markets and the Fed. Data supports further tightening. No cuts in the horizon. Reduction of balance sheet to continue.

Implications

- 2 year treasuries, at 4.73%, up 110 bps in last 3 months, could move still higher
- Equities to correct, at 19x forward earnings
- Sentiment to weaken for EMs
- monetary conditions to tighten further

Markets have been complacent, predicting rate cuts. There could be significant corrections, given that expectations have to be reversed from cuts to hikes.

Prof. ( Dr.) Mridul Dharwal Director, International Accreditation & Ranking Sharda University said "The US Federal Reserve has decides to maintain its interest rate unchanged, even though since March 2022, the Fed has increased interest rates ten times in an effort to combat inflation. But looking the past if necessary, it might increase. The Fed Chair Jerome Powell also said that he understands the hardship caused by high inflation, and is strongly committed to bringing inflation back down to the 2% target he also said that the process of bringing inflation down will be gradual; it will take some time. Nonetheless, Powell stopped short of claiming the Fed's policymakers have agreed to resume rate hikes when they meet again in late July. He stressed that the Fed wants to see an inflation slowdown actually materialise before holding off on further rate hikes.

With that sentiment, it may be questioned why increases were not resumed in this meeting, but it seems appropriate to take a step back and let the previous ten hikes to roll through before tightening further."

In the Indian market, foreign institutional investors (FIIs) exhibited strong buying activity, acquiring approximately ₹1,678 crore worth of Indian cash market. This occurred as the likelihood of a rate hike diminished further due to the Consumer Price Index (CPI) inflation approaching the lower target set by the central bank. On the other hand, domestic institutional investors (DIIs) became net sellers, resulting in an outflow of over ₹203 crore. "We are in bullish momentum (bull run in Indian market) with the ongoing strong market momentum, there is a possibility for the Nifty top reach a new all-time high but it will take some more time. The support from the global market, particularly the US, combined with robust domestic macroeconomic factors, can potentially give more force in this new record." says V.L.A. Ambala (SEBI Registered Research Analyst), Stock Market Today (SMT).