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Going into the FOMC meeting, black clouds gathered on its forecasting horizon were quite evident. While events such as geopolitics have been in the mix for long, US President Donald Trump’s resolve to turn up all the tariff hike levers at his command has been solidified. While some close allies have been targeted and some goods such as steel and aluminium have been hit with tariffs in March, the fieriest salvo will come in April when the reciprocal tariffs take effect.
Recent media reports and surveys have shown business leaders expressing nervousness and consumers fretting about what this means for their household budgets. The sentiment has turned weaker.
It was no surprise then that the Fed’s projections for the economy were lowered while that for inflation and unemployment were jacked up. The main concern for the Fed is the impact that tariffs will have on the US economy. It has also created an air of uncertainty. Much depends on whether the tariffs are a tool to enter into new trade deals or a means to increase tax revenue for the US.
Torsten Slok, chief economist at investment group Apollo, is quoted in this FT article (free to read for Moneycontrol Pro subscribers) that the Fed’s new forecasts signal a stagflation economy ahead, which presents a complex challenge for the Fed. Should they cut rates to support growth or hike rates to curb inflation is the question. Uncertainty has stepped up for the Fed, not surprising as it has become the talk of the town, as my colleague Manas Chakravarty pointed out in his latest edition of the Pro Weekender.
But the Fed did what it does best sometimes, mention the risks but also whisper the right words that can soothe a market’s already-frayed nerves. US markets rose after the Fed decision on Wednesday night. Even domestic equity markets were in good humour, as they have been all of this week.
What explains the upbeat reaction despite the obvious worries?
“While the stance was hawkish, S&P 500 rallied by 1 percent and US 10-year yield cooled down to 4.25 percent. We reckon that the decision to slow the run-down of the balance sheet (from $25 billion to $5 billion) and Fed chair Jay Powell’s comment that tariff inflation is transitory (echoing Treasury Secretary Scott Bessent’s views) may have helped,” writes my colleague Anubhav Sahu. The prospect of tariffs not having a lasting effect on prices and a more comfortable liquidity situation is what the market may have chosen to focus on.
He also provides a perspective of how the market context has changed, where there are more options for investors such as European and Chinese assets, which provide new buckets for money to flow into from the existing ones. What that also means is those existing buckets could see some de-rating in the process. What about the outlook for Indian equities? Do read Sahu’s piece here to get a top-down picture.
The positive reaction of stock markets to the caution expressed by the Fed appears to indicate an expectation that people in power – whether politicians or central bankers — have things under control and ultimately will do the right thing by them. But history has shown central bankers in the developed world getting it wrong on the inflation being transitory not very long ago, post-COVID. Therefore, take such statements and subsequent market reactions with a pinch of salt. Keep watching this space, as the Moneycontrol Pro team will keep a close eye on the data — global and local — and what they mean for market.
Investing insights from our research team
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Markets
Technical Picks: BHEL, TCS, PEL
Ravi Ananthanarayanan
Moneycontrol Pro
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