News Analysis

Takeaway for the markets from the US Federal Reserve meet

Gurumurthy K BL Research Bureau | Updated on September 23, 2021

While global and Indian equities have broadly reacted positively today, the question of when the asset taper will begin still remains unanswered

The US Federal Reserve on Wednesday left its policy rates unchanged in the 0 per cent–0.25 per cent range. While this was widely expected, the market was looking for an announcement on the stimulus taper. The Fed will continue with its current asset purchase quantum of $120 billion per month but will start cutting down soon. However, the question of when the asset taper will begin remains unanswered. In his speech earlier in the month of August, the Fed Chairman Jerome Powell had said that the central bank will start tapering its asset purchase by the end of this year. Following this, the market was anticipating hearing from the central bank on the date from which this would begin. Although the beginning of the taper is yet to be announced, the Fed in its statement had said that the pace of the taper will be in such a way that it would end around the middle of next year.

Revised projections

In its economic projections, the Fed has revised the inflation forecast significantly higher for the current year. The Personal Consumption Expenditure (PCE) inflation has been revised higher to 4.2 per cent for 2021 from the earlier forecast of 3.4 per cent. The Core CPI inflation is likely to be at 3.7 per cent in 2021, revised up from 3 per cent projected earlier in June. The higher revision in inflation comes on the back of supply constraints in some of sectors.

The economic growth for 2021 has been revised lower. The Fed expects the US to grow at a pace of 5.9 per cent this year, slower than its earlier forecast of 7 per cent. However, the growth projections for 2022 and 2023 have been revised higher to 3.8 per cent and 2.5 per cent from the June forecast of 3.3 per cent and 2.4 per cent respectively.

Rate hikes

The central bank has reiterated that the winding up of asset purchase by the middle of next year does not mean that it will be followed by interest rate hikes immediately. The Fed will wait for the labour market and inflation to attain its target before beginning the rake hike cycle. However, the Fed’s dot plot shows that the rate hike is more likely to begin next year itself, and will be followed by three rounds of increase in 2023.

Equities rise

Global equities have broadly reacted positively to the Fed’s policy meeting outcome. The major indices in the US closed over 1 per cent higher. The Dow Jones Industrial Average has risen back above 34,000 to 34,258.32 . It has to be seen if it can get a strong follow-through rise from here and rise past 35,000. The Dow has to breach 35,000 decisively to completely negate the danger of falling-back to 33,000 from here.

In Asia, Japan’s Nikkei (29,639) and Korea’s Kospi (3,129) are down slightly in the range of 0.4-0.6 per cent. China’s Shanghai Composite (3,641) and Hong Kong’s Hang Seng (24,326) are up about 0.4 per cent.

In India, the Sensex and Nifty 50 have surged over 1 per cent. Sensex is trading at 59,565 and Nifty is trading at 17,729. Nifty has room to test 17,800–17,850 from here and Sensex can test 59,900–60,000.

Dollar retreats

The US Dollar Index (93.30) surged from around 93 to 93.50 after the Fed meeting outcome. However, it has come down in the Asian session now and is currently at 93.30. The index has strong support at 93. As long as it sustains above this support, it can rise to test 94 in the coming days.

On the domestic front, the Indian rupee has recovered well today after falling to a low of 73.93 on Wednesday. It is currently trading at 73.70. It has room to strengthen further towards 73.60 during the day. The level of 73.60 will be a key resistance for today which will have to be broken to strengthen further towards 73.40. The price action at 73.60 will need a close watch today.

Published on September 23, 2021

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