Fed focused on controlling inflation even amidst a slowing economy
Fed funds rate rises by 75 bps to 3-3.25% post the Sep’22 meeting.
Avg 30-year mortgage rates are on an uptrend reaching a high of 6.25% last week. It is expected to rise even higher after this rate hike and the forward projection by FOMC. The avg rate used to be approx. 3% in the beginning of the year.
Avg hourly earnings in Aug’22 was $32.36, higher than $30.76 recorded a year back. During the same time, the unemployment rate declined from 4.7% to 3.7%. FOMC projects that with the future policy rate trajectory, unemployment levels may once again rise to 4.4% in 2023 and start coming down only in 2025. This is expected to provide a respite from wage inflation.
FOMC members also expect that with the current projected rate trajectory, CPI will come down to 2.8% in 2023 and the targeted 2% by 2025. Currently, the CPI stands at 8.3%.
Market reaction
Equity
- The U.S
10-year G-Sec rose from 3.49% in the beginning of the week to 3.53% after the
rate hike yesterday.Sensex is trading 0.7% lower than the previous close at 11:30 am today.
-
Japanese Nikkei 225 is down 0.6% from its previous close yesterday.
Debt
- Dow jones declined 1.7% at close yesterday. While a rate hike was expected, markets did not expect the future projections to remain as hawkish as stated in the statement.
The India 10-Year G-Sec rose from 7.25% in the beginning of the week to 7.34% today at 11:30 am.
The Indian call money rates have also tightened after the fed release from 5.54% yesterday to 5.72% today.
FX Markets
- The USD index rose from 109.54 in the beginning of the week to 111.47 yesterday, after the release, underlining the rising strength of the USD against its major trading partners in an uncertain environment.
The USDINR rose from 79.69 in the beginning of the week to 80.72 today at 11:30 am
Policy rate actions across other major economies :
| Country | Policy Rate hikes in FY22 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Emerging | April | May | June | July | August | September | |||
| China | 3.70 | 3.70 | 3.70 | 3.70 | 3.65 | ||||
| India | 4.00 | 4.00 | 4.90 | 4.90 | 5.40 | ||||
| South Africa | 4.75 | 4.75 | 4.75 | 5.50 | 5.50 | ||||
| Brazil | 11.75 | 12.75 | 13.25 | 13.25 | 13.75 | ||||
| Developed | |||||||||
| EuroZone | 0 | 0 | 0 | 0.50 | 0.50 | 1.25 | |||
| U.S* | 0.50 | 1.00 | 1.75 | 2.50 | 2.50 | 3.25 | |||
| U.K | 0.75 | 1.00 | 1.25 | 1.25 | 1.75 | ||||
*Upper range of Central bank interest rates
Likely action by RBI
RBI meeting is scheduled on the 30th September’22. RBI is likely to keep its aggressive stance unchanged, with policy repo rates expected to go up by another 35-50 bps to 5.75 to 5.90%, followed by more hikes in the subsequent meetings.
The inflationary situation in India is yet to come under control. CPI in Aug’22 was reported at 7%, 100 bps above RBI’s upper tolerance level. Also, the reducing spread between Indian and U.S rates will take a toll on the USDINR unless RBI continues to raise interest rates in sync with the Fed.
TruQuest is knowledge series launched by TruBoard Partners providing succinct updates and views on:
- Liquidity outlook
- India’s macro economic view
- Trends within the infrastructure, Real Estate and Renewable Energy sectors
- Impact analysis of new regulations and policies on lending and capital flow
Team:
Debopam Chaudhuri, Head of Research and Ratings
Ria Rattanpal, Research Associate
Komal Chavan, Marketing Associate
91-9819239926, dc@truboardpartners.com
Author:
Debopam Chaudhuri, Head of Research and Ratings
Ria Rattanpal, Research Associate
Komal Chavan, Marketing Associate
+91-9819239926
dc@truboardpartners.com
Disclaimer
The data and analysis covered in this report of TruQuest has been compiled by TruBoard Pvt Ltd and its associates (TruBoard) based upon information available to the public and sources believed to be reliable. Though utmost care has been taken to ensure its accuracy, no representation or warranty, express or implied is made that it is accurate or complete. TruBoard has reviewed the data, so far as it includes current or historical information which is believed to be reliable, although its accuracy and completeness cannot be guaranteed. Information in certain instances consists of compilations and/or estimates representing TruBoard’s opinion based on statistical procedures, as TruBoard deems appropriate. Sources of information are not always under the control of TruBoard. TruBoard accepts no liability and will not be liable for any loss of damage arising directly or indirectly (including special, incidental, consequential, punitive or exemplary) from use of this data, howsoever arising, and including any loss, damage or expense arising from, but not limited to any defect, error, imperfection, fault, mistake or inaccuracy with this document, its content.