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Quantum, pace of Fed rate hikes may cool down, future hikes dependent on data: Manishi Raychaudhuri

On the market reaction to the Fed rate hike, Manishi Raychaudhuri, Asian Equity Strategist- Asia Pacific at BNP Paribas believes that the equity and bond markets showed a relief rally.

July 29, 2022 / 01:11 PM IST
Manishi Raychaudhuri Asia-Pacific Head of Equity Research and Asian Equity Strategist - BNP Paribas (Image Source: Twitter/ @Manishi_R)

Manishi Raychaudhuri Asia-Pacific Head of Equity Research and Asian Equity Strategist - BNP Paribas (Image Source: Twitter/ @Manishi_R)

The US Federal Reserve raised its benchmark overnight interest rate by three-quarters of a percentage point on July 28 in an effort to cool the most intense breakout of inflation since the 1980s.

The rate-setting Federal Open Market Committee lifted the policy rate to a range of between 2.25 per cent and 2.50 per cent in a unanimous vote.

Coming on top of a 75-basis-point hike last month, and smaller moves in May and March, the Fed has raised its policy rate by a total of 225 basis points this year to a level now that most Fed officials believe has a neutral economic impact, marking the end of pandemic-era monetary stimulus.

Also Read: Fed raises rates by 75 basis points to double down on inflation

After the Fed announcement, the equity and bond markets had an outsize reaction, especially the Nasdaq. The S&P 500 about doubled gains after Fed Chair Powell spoke and was up 2.6 per cent going in late trade. The 10-year US Treasury note yield rose 2.7867 per cent. The yield on the two-year fell to 2.9776 per cent, while the US dollar briefly extended losses to 0.6 per cent.

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On the market reaction to the Fed rate hike, Manishi Raychaudhuri, Asian Equity Strategist- Asia Pacific at BNP Paribas believes that the equity and bond markets showed a relief rally.

''The Fed statement was comforting to the markets on two counts. Firstly, the Fed hinted that the quantum and pace of rate hikes could cool down. Secondly, Fed Chair Powell's use of the word 'soft landing' - meaning he did not believe the economy was in recession.'' Raychaudhuri said in an exclusive interview with CNBC-TV18.

On the sector-specific outlook, Raychaudhuri claims that IT companies have indicated that revenue growth will continue, but margin could contract. ''IT companies have not yet indicated of any pullback in tech spends. One should prefer those IT firms with solid revenue visibility and large order wins,'' he said.

Also Read: IT stocks no longer frothy, tactical upside ahead: CLSA's Vikash Jain

Domestic economic indicators are looking up, according to the strategist. ''Companies that are looking at value addition could see non-linear growth from here on,'' he added.

The latest increase puts rates near Fed policy makers’ estimates of neutral -- the level that neither speeds up nor slows down the economy. Forecasts in mid-June showed officials expected to raise rates to about 3.4 per cent this year and 3.8 per cent in 2023.
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