While keeping the interest rates unchanged, US Federal Reserve Chairman Jerome Powell signalled that rate cuts are likely in June barring unforeseen negative surprises on the strong side. Investors were relieved after FOMC participants signalled they still expect to cut rates three times in 2024.
Fed’s messaging sparked a global rally in stocks. Wall Street ended 1% higher overnight, Japan’s Nikkei and Hong Kong’s Hang Seng were trading 2% higher while Sensex jumped over 700 points. A majority of 67% Wall Street traders are expecting the Fed to cut rates by 25 bps in its June meeting, shows CME FedWatch Tool.
Lower interest rates stimulate the economy and are good for assets like stocks. Fed’s dovish commentary also made gold prices jump by about Rs 1,000 per 10 grams to a fresh lifetime high of Rs 66,778 on MCX today.
Powell’s statement that “inflation has eased substantially while the labour market has remained strong” conveys conviction about the soft landing of the US economy and the possibility of probably three rate cuts this year.
However, the dots now see a shallower path of cutting in 2025 and 2026 compared to the last forecast in Dec 2023.
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Even as Powell has hinted at a June cut, analysts at Emkay Global stay wary of taking Fed at face value (whose pivots have been noisier post-Covid) which could yield investment strategy errors.
“We reckon the possible error of judgement on inflation transience and permanence post-Covid, has its roots in the fact that macro models are based on past-decadal trends, while the new structural shifts are yet to be incorporated,” said Emkay’s Lead Economist Madhavi Arora.
She sees a high probability of ‘No Fed cuts’ in 2024, as they struggle to get to the last mile of disinflation.
“This will soon spill over to EM CBs, including the RBI. But unless it is accompanied by immediate negative growth shocks, we don’t see a crash in EM risk assets and believe that the cherry-picking theme will work well for Indian assets, specifically INR and Indian bonds,” Arora said.
The level of 4.335% on 10-year treasury yields remains crucial for the bulls. The moment yields start trending above this level we might see a deeper correction in Indian markets, said Apurva Sheth of SAMCO Securities.
Now, all eyes will be trained on the personal consumption expenditure figures for February that will be released on March 29.
“These figures would serve as a touchstone to the question of whether the Fed will truly be in a position to push through with the first of the three rate cuts it has pencilled in for 2024,” said Subho Moulik, CEO & Founder, Appreciate.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
