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In a bid to quash the worst domestic inflation witnessed for about four decades, the US Federal Reserve hiked rates by 75 basis points to 3.75-4 per cent yesterday. The fourth consecutive hike of this magnitude, it signals no letting up in hikes while pushing terminal rates higher.
Fed Chair Jerome Powell’s speech continued its hawkish tone. That the Fed is willing to dial down its pace of rate hikes, perhaps even as early as in December, comes with several conditions. The committee would consider the impact of cumulative tightening and the lags with which rate hikes affect “economic activity and inflation as well as economic and financial developments”.
Indeed, the impact of policy tightening and rate hikes is hardly visible in the US economy. Sticky Personal Consumption Expenditure (PCE) inflation (latest at 5.1 percent) and unemployment rate at a 50-year low are hardly comforting for policymakers. One segment where rate hikes have cooled off demand is housing. Going by previous cycles and the fact that there are more imponderables this time due to the pandemic, the Ukraine war and geopolitics, policymakers cannot estimate clearly when demand and inflation would cool off across the board.
It is not surprising that while Powell spoke of dialling down, there is no hurry to pivot! His statements such as “risks to pausing prematurely are higher than overdoing interest rate hikes” and “overtightening can be managed as they have the tools to strongly support the economy” indicate that Powell’s punches are likely to continue for some time ahead.
The conundrum on rate hikes, therefore, raises the following questions: how fast, how high and for how long? What’s clear for now is that there is no pivoting and no reversal, yet.
The uncertainty was mirrored in the quick reversal in the Dow Jones index that closed lower. The emerging markets (EMs) are in a state of flux, too. As rate hikes in the US continue, the gap between US’ and EMs’ rates narrows, making them vulnerable to dollar outflows. India is no exception. Dollar outflows and a depreciating rupee have increased the challenges for the RBI that is now having to answer the government on its failure to contain inflation.
In a nutshell, the chances of a soft landing are fading fast. In this article, Anubhav Sahu writes about the impact on India and also suggests what investors must do. Export-oriented businesses will face challenges, while a depreciating rupee could fuel inflation and costs, which if not contained, would slow economic growth that is just recovering from the pain inflicted by the pandemic.
The good news is that India continues to be resilient. The October data of the S&P Purchasing Managers’ Index for India showed expansion in both manufacturing and services activities, while inflationary pressures are muted -- a Goldilocks scenario.
Investing insights from our research team
Adani Ports & SEZ has the wind at its back
Meaningful tailwinds for Chola justify premium valuation
Bikaji Foods International IPO: Perfect taste for long-term investment
Global Health IPO: Play on regional healthcare demand, subscribe for long term
JK Paper: Profit soars, sector tailwinds to leave a mark on valuation re-rating
Voltas Q2: Facing stiff competition
Varun Beverages: Energy drink Sting adds zing to earnings growth
What else are we reading?
COP27 | Will Sharm-el-Sheikh summit live up to expectations?
Jerome Powell delivers masterful performance at a difficult time
Is Navin Fluorine spreading itself too thin?
Start-up Street: ‘To be rich or to be king’ - an entrepreneur’s dilemma
DLF’s next valuation trigger could come from REIT issue
Slower, longer, higher (republished from the FT)
Technical Picks: IRCTC, Vedanta, Hero MotoCorp and USD-INR (These are published every trading day before markets open and can be read on the app).
Vatsala Kamat Moneycontrol Pro
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