As investors gear up for the conclusion of the Federal Reserve’s two-day policy meeting later today, markets are on tenterhooks anticipating the central bank’s decision on interest rates. Most analysts expect the Fed will raise rates by another 75 basis points, the fourth consecutive hike of such magnitude, in its fight against stubbornly high inflation. Fed Chair Jerome Powell’s press conference after the meeting will provide crucial insights into the outlook for further tightening.
The Fed has already raised rates to a range of 3%-3.25% this year from near-zero levels in March. However, consumer price inflation has shown resilience, remaining close to a 40-year high of 8.2% in September. With price pressures broadening beyond food and fuel, the Fed is under pressure to act aggressively to prevent inflationary expectations from becoming entrenched. Powell has emphasized the Fed’s resolve to get inflation under control even at the risk of some pain to the real economy.
A 75 bps hike today is widely seen as a done deal. The focus will be on any signals Powell provides about the pace of future hikes. Some analysts feel a smaller 50 bps hike could be on the cards in December, given recent data showing a moderation in activity and signs that tighter financial conditions are cooling demand. However, much will depend on upcoming inflation prints and how embedded high prices appear. The Fed chief may reiterate the central bank’s commitment to restrictive policy for some time.
Markets have been on a rollercoaster ride ahead of the meeting. Bond yields surged and stocks tumbled recently on fears of more aggressive tightening. But some cooling in inflation expectations and hopes of a Fed pivot helped risk assets recover from lows. The dollar has strengthened to multi-decade highs, adding to imported inflation woes for other countries. Emerging markets with large dollar debts face added vulnerability.
Back home, the National Stock Exchange (NSE) has revoked the inclusion of Indian Renewable Energy Development Agency (IREDA) in some key indices after finding the company had made incorrect disclosures about a stake sale. IREDA was set to be included in Nifty500, Nifty100 and other indices from December 5th. But the exchange decided to keep IREDA out after the company admitted it had wrongly announced a divestment plan by the government. This is an embarrassing blunder for IREDA as index inclusion brings more visibility and investor interest.
In other domestic news, the ongoing weakness in the rupee is adding to India’s inflation woes by making imports costlier. A stronger dollar and high oil prices have sent the rupee tumbling to fresh lows in recent months. While the RBI has been intervening to prevent excessive volatility, a durable recovery in the currency looks difficult until US inflation shows clear signs of peaking. That puts the onus on the central bank to raise rates further to preserve export competitiveness and financial stability.
With so much market moving events scheduled today, volatility is expected to remain high. A lot will depend on the signals the all-powerful Fed chief gives about the future path for interest rates and inflation. His remarks will be keenly watched for clues on whether the central bank can achieve a soft landing for the economy or end up causing a recession.
