According to Stefan Hofer, Chief Investment Strategist for APAC at LGT Private Bank, the U.S. Federal Reserve's June policy meeting aligned well with market expectations and reaffirmed the Fed’s commitment to its dual mandate of full employment and price stability.
Hofer believes that under the current conditions, including a resilient labour market, two rate cuts in 2025 remain a perfectly plausible scenario.
On the domestic front, he remains optimistic about India’s growth trajectory.
"India tops the league table in terms of GDP growth projections for 2025, and is likely to retain that position into 2026 as well. This strong outlook alone should attract continued flows into Indian assets, particularly as valuations have moderated somewhat," he said.
Is the entire Fed policy statement largely in line with your expectations? Do you see any concerns, specifically related to inflation and economic growth, in Powell's commentary?
In the run-up to the latest FOMC meeting, inflation prints (for May 2025) had not yet captured a meaningful impact of the new tariffs on US imports. This means that Chair Jerome Powell and the committee took into account both current economic conditions, which are robust, and the anticipation that domestic prices would pick up later this summer. In this context, the FOMC meeting was in line with expectations and in line with the Fed’s dual mandate of full employment and price stability.
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Do you still expect at least two more Fed funds rate cuts in the second half of 2025?
The lynchpin for rate cuts would be a marked deterioration in the labour market. While estimates vary, the so-called “natural rate” of unemployment in the US is around 4.5 percent. We are currently below this level so it is reasonable to say the job market remains healthy. That said, a baseline assumption that 2025 will see two rate cuts is perfectly plausible under current circumstances.
Also read: Federal Reserve's dot plot signals two rate cuts ahead in 2025
Is the Iran-Israel conflict a significant concern for equity markets and oil prices?
The Iran-Israel conflict is centred on the elimination of Iran’s nuclear weapons capabilities, and financial markets have taken this in stride so far. That said, the situation remains highly fluid and active military involvement by the US could see a spike in market volatility. Up to now, one reason that market reaction has been modest is that global energy supplies have not been impacted.
What is the likelihood of Iran disrupting the Strait of Hormuz? If that happens, is it likely the U.S. would take full-scale action?
The Strait of Hormuz is the focal point of the conflict from a market perspective. A 20 percent of global energy supply moves through this narrow channel of sea every day. For now, markets are not pricing in any disruption because that would hinder Iranian oil shipments as well.
Do you expect the tariff risk to subside or persist after the July 9 deadline?
Investors should assume that the baseline universal tariff of 10 percent will more or less become the “new normal” for the foreseeable future. The flurry of bilateral trade deals being signed make the overall effective import tariff rate a moving target – but to argue that we will return to the previous norm where the US average weighted import tariff was below 2 percent is not realistic, in our view.
Also read - ‘Someone has to pay’: Fed's Jerome Powell says tariffs will drive inflation higher
Do you expect the U.S. Dollar Index to decelerate further in the coming months?
We continue to see room for further US dollar depreciation over the coming months. In part, this is because the Trump Administration has abandoned long held US policy of promoting a “strong dollar”. We expect the current trend of investors’ diversifying away from the US dollar to persist.
Do you strongly believe India is a leading contender among emerging markets for investment and poised to attract significant foreign inflows soon?
India is at the top of league table when it comes to GDP growth, for 2025 and likely in 2026 as well. This expectation alone should drive flows into Indian assets, especially as valuations have come down somewhat. On the other hand, spiking geopolitical risk will draw investors into safe-haven assets and that would be a (temporary) headwind for India.
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