The US Federal Reserve on Wednesday increased interest rates by 25 basis points, which is likely to drive Indian markets higher. Here are top takeaways from the US central bank’s policy document.
The US Federal Reserve, on expected lines, increased interest rates by 25 basis points (bps) on Wednesday, pushing stocks up while bond yields fell on the supportive economic outlook.
The US central bank increased the interest rate to a range of 0.75 percent to 1 percent on strong macroeconomic data and confidence in inflation, which is rising to central bank’s target.
We have collated top five takeaways from US Federal Reserve policy document.
The US central bank increased rates for the second time in the last three months and promised that any further hikes will only be ‘gradual’.
“The FOMC expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate,” the US Fed said in a statement.
“The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” it added.
Two more hikes in 2017
The statement projects two more rate hikes in 2017, which is largely on expected lines, should not hit the Indian markets hard. India is a domestic story and correction due to global factors should be bought into.
“A 25 bps increase by the Fed is already discounted by markets. Anything above that is bound to adversely impact markets, at least for the short term,” Jayant Manglik, President, Retail Distribution, Religare Securities told Moneycontrol.com.
“But our markets continue to be strong and investors should buy on every reasonable dip. Make no mistake, we are in a bull market,” he said.
Based on projections made by US Fed, there could be two additional rate increases this year and three more in 2018. The median fed funds rate estimate for 2019 rose to 3 percent from 2.9 percent.
Inflation increased in recent quarters, moving close to the FOMC's 2 percent longer-run objective. The committee expects that inflation will stabilise around 2 percent over the medium term.
The near-term risks to the economic outlook appear roughly balanced. The committee continues to closely monitor inflation indicators and global economic and financial developments, it said in a statement.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the committee said that it will assess realised and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.
An increase in US Fed rates usually aid dollar strengthening, but it weakened against a basket of currencies soon after the announcement. US dollar sank to a three-week low of 100.540 against a basket of currencies.
Analysts suggest that absence of any hawkish guidance from the US Fed might weigh on the dollar. But, a strong correlation is seen after a week of US Fed meeting, Reuters said in a report.
“The tone of the FOMC message will be crucial, as dollar has not looked quite running up to the decision day, suggesting that there are uncertainties that the greenback is presently pricing in, and is less likely to see a unilateral rise,” Anand James, Chief Market Strategist at Geojit Financial Services told Moneycontrol.com.
“But, dollar should progressively move higher, and rupee should see course correction soon, regaining its trajectory towards 70/USD,” he said.
With gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labour market conditions will strengthen somewhat further, FOMC said in a statement.
The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate. The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” it said.The actual path of the federal funds rate will depend on the economic outlook as informed by incoming data, it added.