What To Expect From The US Fed Decision Tonight?

The evolving bank crisis across the globe has made the job of the US Fed all the more tricky this time. A faster than expected rate hike, may cause further problems for the banking sector not only across Europe, but, also in the US. A decision on key interest rates is expected tonight at around 11.30 pm IST.

Will the US Fed go for a 25 basis points hike or status quo on interest rates?

Until the banking crises evolved, there were worries that the Fed would continue to raise interest rates aggressively. However, that perception is fast changing. "The series of events have unexpectedly changed the outlook for Fed's interest rate path. The earlier probability of US Fed fund rate peaking at 5.5-5.75% and staying there for entire CY23 has now swung to cut of ~100 bps by end-CY23 starting Jun'23. In this light, the dot plot to be released post Federal Open Market Committee (FOMC) meeting on 22nd Mar'23 has gained additional importance to look for signs of Fed's thought process," HDFC Mutual Fund said in a report.

This had led to some rally in stocks across the globe over the last few days. Remember, rising interest rates is not good for stocks, and commodities like gold. What does happen is that investors move money from stocks and commodities to the more safe sovereign bonds or high interest bearing instruments, putting pressure on stocks and gold.

Almost three-quarters of respondents (72%) expect the Fed to hike by one-quarter of a percentage point, according to the CNBC survey, but only 52% say the Fed should hike. On Tuesday morning, the CME FedWatch finds the market pushing up bets on a 25 basis point hike to over 81% (it had been 74% on Monday).
What's also important would be to see the future rate hikes and whether there is likely to be a pause in the immediate future. The Fed commentary suggests that there hasn't been enough evidence in the data to suggest the fight against inflation has progressed to the point where it should have confidence that credit tightening can do the disinflation job without another rate hike.
In India markets are looking in anticipation and are also cautious. "We advise investors to remain cautious, as markets are likely to remain volatile ahead of Fed's meeting outcome on Wednesday late evening. US Fed's commentary amidst the ongoing financial crisis would be of key importance and can provide some direction to the markets, says Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services Ltd.