US Fed decision and Jerome Powell’s hawkish talk: How it impacted asset classes across the world

The outcome of the US Federal Reserve meeting on Wednesday has sparked jitters in the global markets, especially in the risky assets such as the equites. The US Treasury yields and the dollar index have risen sharply, while the global equities have been under pressure since the Fed meeting outcome.

The fall in equities is surprising as the outcome of the Fed meeting is ‘less hawkish’ in comparison to the expectations. In some ways, it looks like an excuse to trigger a correction following rally in global equities on soft landing hopes.

Interest rate decision

The US Federal Reserve on Wednesday left their policy rates unchanged at 5.25-5.5 per cent. This is inline with the market expectations. The central bank kept its forecast on the median fund rate for 2023 unchanged at 5.6 per cent. With this, the Fed has left the doors open for one more rate hike of 25-basis points (bps) for the rest of the year.

Also read: Nifty at all-time high, but not on valuations? 

Two more meetings are due for this year and the Fed could increase the rates in any one of them. The Fed and Jerome Powell continued to insist that their future course of action will be data dependent and actual decisions can turn out to be different from the current forecasts.

Higher for longer

“The process of getting the inflation into the 2 per cent target level is a long way to go, will hold rates higher until we are confident that the inflation is moving down towards our target,” said Powell in his press conference on Wednesday.

One major change in the Fed’s forecast from its earlier one was on the future policy rate front.

The median fund rate for 2024 and 2025 have been revised higher by 50-bps each. In June, the Fed had forecast the median fund rate to be at 4.6 per cent and 3.4 per cent in 2024 and 2025, respectively. This has been revised higher to 5.1 per cent and 3.9 per cent for the respective years. That is, if 5.6 per cent (median fund rate for 2024) is the peak then there could be just 50-bps rate cut in 2024, down from the earlier forecast of 100-bps cut.

The Fed’s move clearly indicates that the central bank intends to keep the rates at this elevated levels for a prolonged period of time and is in no hurry to cut rates.

The Federal Reserve Chairman Jerome Powell in his press conference on Wednesday said that the central bank has come very far and very fast in terms of rate hikes and will now proceed very carefully going ahead on the policy front.

Boiling crude prices

The Fed’s inflation forecast indicates that the central bank is not much concerned about the recent rise in the energy prices, indicating that its decisions are not swayed by short-term fluctuations.

Powell said that the price rise will have an impact only if it sustains higher for long time. The Fed’s inflation forecast indicates that the central bank is not expecting the energy price rise to impact medium-term core inflation trends.

Powell also noted that if the high energy prices continue for longer periods, it will feed into business pricing decisions and inflation expectations of individuals and can have an undesirable impact.

The Personal Consumption Expenditure (PCE), the Fed’s inflation gauge, is forecast to be at 3.3 per cent this year, slightly higher than the earlier forecast of 3.2 per cent. However, the PCE forecast for 2024 remains unchanged at 2.5 per cent.

Bonds, dollar surge

The US Treasury yields have surged after the Fed meeting outcome on Wednesday. The US 10-year Treasury yield (4.42 per cent) has surged well above the key intermediate resistance level of 4.35 per cent. The outlook is bullish. If this rise sustains, the 10-year yield can move further higher to 4.5-4.6 per cent in the short-term.

The dollar index (105.50) rose to a high of 105.68 and has come down slightly from there. The level of 106 is a crucial resistance which can be tested in the near-term. The index has to breach 106 decisively to move further higher.

Such a break can be very bullish to take the dollar index up to 108 and even higher going forward. But failure to break above 106 can drag the index down to 105-104 again. The price action around 106 will need a close watch.

On the domestic front, the Indian rupee (USDINR: 83.10) remains broadly stable around 83. The domestic currency can remain in a range of 83-83.30 (narrow) or 82.80-83.30 (broad) for some time now. A breakout on either side of 82.80 or 83.30 will determine the next leg of move.

Equities tumble

In the US, the Dow Jones Industrial Average (34,440.88) declined sharply from the day’s high of 34,776 on Wednesday after the Fed meeting. In Asia, most of the major indices are down over a per cent today taking cues from the fall in the US equities.

In India, the benchmark indices are down about 0.85 per cent. Nifty is currently trading at 19,735. It has been on a declining path over the last three trading days. It is now trading below the key intermediate support level of 19,800. It has room to fall further towards 19,600-19,500 in the coming sessions.

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