Moneycontrol Pro Panorama | Fed in a fix 

US Federal Reserve Chairman Jerome Powell.

Dear Reader,

Clearly, the US Federal Reserve seems to grappling with uncertainty in the US economy following President Donald Trump’s sweeping policy changes that are still fluid. The committee decided to continue with its policy rate at 4.25-4.5 per cent, citing risks of trade volatility due to tariff uncertainties, higher inflation, and higher unemployment.

The lack of clarity that has compelled the US central bank to keep rates unchanged came through in some of chairman Jerome Powell’s statements. He reiterated that the US economy is growing at a “solid pace”, but it isn’t clear if this growth will continue or the economy will buckle under Trump’s policy changes. Today’s FT article-The Fed digs in- (free to read for MCPro subscribers) highlights that the Fed is perhaps concerned about stagflation. While it is not forecasting higher prices and unemployment, it is certainly using it as a justification for the decision to hold the policy rate where it is, until the data counsels otherwise.

Per economists, it could be a dry summer in terms of interest rate easing. Some expect the next Fed move to be delayed till September. Note that it has maintained a “wait-and-watch stance” after a bold one percentage point cut.

Ironically, even as the Fed seems to be in a tight spot, central banks across Europe and Asia are clearly in an easing mode. Analysts forecast that the European Commercial Bank is likely to ease rates this quarter, even as India and China continue their bias towards lower rates.

This divergence has also begun weighing on US assets, points out Anubhav Sahu in this article. Capital has recently shifted to regions/countries like India (domestic recovery on cards), Europe (aggressive fiscal push) and Japan (supportive macro data). Both the US and China equity markets have underperformed since the news of tariffs made headlines.

Policy uncertainty has already weighed on US assets (equities, bonds, USD). While there has been a sharp recovery for global equities since Trump announced the breather on tariffs on 9th April, countries in the thick of trade war - US & China – have underperformed.

Underperformance for both the equity markets is likely to continue in the near to medium term and Indian equities should do relatively better.

To be sure, Indian equities are on firmer ground. India’s deft move to sign the UK FTA is a feather in its cap that could not only boost India’s exports but also set a template for negotiations with other countries.

The recent appreciation of INR versus the USD could improve India’s balance of payments and lower the inflation trajectory further. This explains why FIIs flows are back to India in recent weeks, notwithstanding the Indo-Pakistan conflict, that failed to dampen investor sentiment.

My colleague Aparna Iyer, in this article, spells out a few risks to appreciation of the INR in the near to medium term. Any escalation of the conflict could be a drag on the rupee. A decadal low-interest rate differential between Indian and US bonds is a big demotivator for foreign investors to buy Indian bonds. But for equities, India is one of the more resilient markets.

Investing insights from our research team

Polycab India closes FY25 on a high note with robust performance

How should you navigate Indian equities amid escalating tension and global uncertainties?

Godrej Consumer: Building a future-ready portfolio

Dabur: Portfolio transformation, valuation keep us constructive

eMudhra: Positioned for recovery with robust order book, strategic M&A focus

What else are we reading?

India’s premium valuations can weather limited military action, but not a protracted conflict

Operation Sindoor: Will the world wait & watch?

What India and Pakistan’s market reaction tells us about the future trend

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Operation Sindoor: Will it hurt India’s tourism industry?

Op Sindoor succeeded, but Pakistan won’t be deterred from pursuing proxy war

Safeguarding the eye in sky

How Pakistan’s terror network gets funded

As ‘Hitman’ Sharma steps away, questions on transition abound

Tech and Startups

Hexaware reduced BPO workforce by 500 in AI-triggered hiring shift: CEO R Srikrishna

Markets

Majority of biggest FPIs see huge erosion in India portfolio; Goldman Sachs, Govt of Singapore, Norges among those hit

Technical Picks: REC, Neuland Laboratories, Varroc Engineering, Dr. Reddy's Laboratories, Ujjivan Small Finance.

Vatsala Kamat Moneycontrol Pro