Global stock markets heaved a sigh of relief last night when the world’s most powerful central banker Jerome Powell assured investors that it is unlikely for the US Federal Reserve to go for a rate hike. After the Dow Jones ended higher overnight, the Sensex was also up around 200 points this morning.
Investors are now beginning to doubt whether the Fed would be in a position to go for rate cuts at all in the calendar year 2024 given the recent disappointing progress in bringing inflation down.
“No Fed cuts’ in 2024, followed by a shallow cut cycle is turning into a reality, as they struggle to get to the last mile of disinflation. This is already spilling over to EM CBs, including the RBI. But unless it is accompanied by immediate negative growth shocks, we don’t see a collapse in EM risk assets, and believe that the cherry-picking theme will work relatively well for India assets,” said Madhavi Arora, Lead Economist at Emkay Global.
Believing the Fed on face value could yield investment strategy errors, she said.
“This also means that extreme pivots (hikes) may also need a close watch. Clearly, it took the Fed less than two weeks to flip-flop from their March guidance of cuts! The possible past error of judgment by DM policymakers 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,” she said.
The Fed’s preferred inflation measure – the personal consumption expenditures price index – increased at a 2.7% annual rate in March, an acceleration from the prior month.
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“If we did have a path where inflation proves more persistent than expected, and where the labor market remains strong but inflation is moving sideways and we’re not gaining greater confidence, well, that would be a case in which it could be appropriate to hold off on rate cuts,” Powell said. “There are paths to not cutting and there are paths to cutting. It’s really going to depend on the data.”
At the end of a two-day meeting of its rate-setting panel, the Fed has kept interest rates unchanged.
Even if the Fed goes for a rate cut, it will be far lower than initially expected which could be a headwind for global equity markets.
“While the Fed remains responsive to data, the equity markets reacted positively to the assurance that the next policy adjustment would not involve a rate hike. However, It’s essential to proceed with caution, as prematurely declaring victory could occur if the Fed loosens its hold on economic control too early,” said Dhawal Ghanshyam Dhanani, Fund Manager, SAMCO Mutual Fund.
