How US Fed's dovish commentary, interest rate status quo impact your money

The Dow Jones Industrial Average closed above 37,000 for the first time. The S&P 500 surpassed the 4,700-mark, the first time after January 2022, and Nasdaq climbed 1.38 percent overnight.

The “markets absolutely loved this result,” Greg Peters, co-chief investment officer of PGIM Fixed Income told Bloomberg.

Also Read | Fed’s change in stance will trigger a solid rally in largecaps: Saurabh Mukherjea

US stock and bond prices are expected to see modest gains, as the Federal Reserve pivots to cutting rates. However, the easing may not be as aggressive as markets expect. A Bloomberg Survey showed that investors are skeptical about how much US stocks can rally after this year’s advance of almost 23 percent. "Markets are really pushing the limits here. There is so much good news priced in," said Peters.

Low lending rates often boost liquidity and more risk-taking sentiment in stock markets and a rally in US markets may trigger positive momentum in Asian markets including India, as was visible on December 14.

Bond yields

When the Fed cuts interest rates, it typically leads to a decline in bond yields. Reduced interest rates enhance the appeal of higher-yielding existing bonds, driving up their prices and causing yields to decline.

The yield on 10-year US treasuries fell below 4 percent for the first time since August, as traders interpreted the Fed's decision to halt interest rate increases as a cue to increase their expectations for substantial cuts in 2024.

A lower US long-term bond yield is likely to fuel a rally in the Indian market. Since relative attractiveness of equities increases as bond yields decline, investors may pivot towards stocks for potentially higher returns. This shift in preference can lead to increased capital flows into Indian equities as investors seek more lucrative opportunities.

Also Read | Fed shifts stance to speed up flows, miles to go for smallcaps yet: Shankar Sharma

Inflation, growth

Fed officials envision a “soft landing” for the economy, in which inflation would continue its decline toward the central bank’s 2 percent target without causing a steep downturn.

In its quarterly projections, the Fed policymakers now expect “core” inflation to fall to just 2.4 percent by the end of 2024. They project the economy will expand at a modest 1.4 percent next year and 1.8 percent in 2025.

If the US can avoid a recession, as suggested by the economic projections, this would benefit the wider Asian region, given earnings are correlated to export growth and may see a resumption of inventory restocking cycle, Kerry Craig, global market strategist at JPMorgan Asset Management, told Bloomberg.

JPMorgan’s chief global strategist David Kelly, however, said the most dangerous time for the US economy is when a tight Fed begins to ease because consumers may delay their borrowing until a later date as they wait for interest rates to eventually come down.

"Ultimately, the Fed’s pivot is good news today for both the stock and bond market, but I am just a little bit more cautious on growth now that the Fed has finally pivoted," he told CNBC.

Interest rate cuts by the Fed, whenever they happen, would reduce borrowing costs across the economy. Stock prices could rise, however, as markets have potentially baked in the good news already, upside will be limited.

Also read: MC Explains: Why Fed took a dovish stance and what it means for Indian markets

Rupee appreciation

Following the Fed meeting, the rupee showcased strength by appreciating towards the 83.16 levels.

A rate cut may weaken the US dollar, prompting investors to explore alternative assets, including the Indian rupee.

Foreign investors may get drawn to Indian equities, potentially leading to increased capital inflows, which, in turn, may help the rupee to appreciate. Rupee appreciation may contribute to lower imported inflation, influencing India's overall inflation levels.

Also Read | Sensex, Nifty hit record highs on Fed's dovish pitch, analysts expect largecaps to finally get going

According to Amit Prabi, MD, CR Forex Advisors, despite the turnaround in US DXY and bond yields amidst discussions of 2024 rate cuts, which should have been positive for the rupee, the RBI appears to be the sole player on both ends, sidelinning spectators' interest. "We anticipate that, as the year progresses toward its end, so will the RBI's strategy. Eventually, the balance will shift, favouring both importers and exporters equally," he said.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.