Powell’s dovish policy may provide relief to markets, again spark hope of early rate cut instead of hike

US Federal Reserve Chair Jerome Powell

US Federal Reserve Chairman Jerome Powell’s latest monetary policy comments on Wednesday are likely to provide relief to the equities markets waiting with bated breath to see if persisting inflation concerns require a further tightening of rates.

Not only this, Powell’s comments seem to have allayed to some extent fears that the interest rate cut would be pushed away to November -- traders are now eyeing a rate cut as early as September. This brings the sentiment back towards hoping for a rate cut, instead of a fear of a surprise rate hike.

The S&P 500 index jumped immediately for a brief period in Wednesday's intraday trading after Powell told reporters “it is unlikely that the next rate move will be a hike.” The index fell again to end down by 0.34 percent for the day at 5,018.39, as the reality of the higher rates holding for now sank in.

Nonetheless, GIFT Nifty was trading positive on Thursday morning. In the early morning trade, the GIFT Nifty index on NSE IFSC was up 0.57 percent at 22,747, presumably on the back of a rate cut due soon.

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“Fed Chairman Jerome Powell conference is ‘dovish’ in my view (trying to be market friendly), as traders prices in September as the likely timing for the first Fed rate cut, versus November seen before Jerome Powell comments,” said Ritesh Jain, co-founder, Pinetree Macro.

Jain said he sees lower US dollar, lower US bond yields, stable Yen and higher asset prices in the near term, following the latest US Fed decisions.

Bond markets also relieved

The Federal Reserve’s downplaying of the expectations for immediate interest rate hike provided relief to the bond markets.

Further, Powell announced that the Fed would decelerate the reduction of its balance sheet to alleviate pressures in money markets. The Fed will slow the reduction of the balance sheet by cutting the treasury redemption cap by $35 billion (against the expectation of $30 billion) per month from $60 billion starting 1 June.

One other development that is also likely to augur well for the markets in the near term is the US Treasury’s quarterly refunding, which came in line with the street expectations, said Jain.

On Wednesday, the US Treasury announced that it will maintain its quarterly issuance of longer-term debt at previous levels, According to a statement, $125 billion in longer-term securities, including 3-, 10-, and 30-year Treasuries will be offered next week in what are known as quarterly refunding auctions. This follows an increase in auction sizes over the past three quarters, some reaching record highs.

Treasury officials also noted that they do not foresee a need to raise sales of regular notes and bonds “for at least the next several quarters.”

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