U.S. Federal Reserve Raises Rates

U.S. Federal Reserve Raises Rates

Indian stock markets have been going through a very volatile phase lately. After steadily inching lower below the 10,500 mark, markets bounced back sharply to record six straight days of gain bringing it within touching distance of the 11,000 mark. Many tailwinds such as easing of oil prices, softening of bond yields and strengthening of the rupee against the dollar among other macroeconomic indicators played a role. If Sankaran Naren, chief investment officer at ICICI Prudential Asset Management Co. who helps manage a 44 Billion $ fund is to be believed, of all the factors that affect our stock markets, the U.S. Federal Reserve holds most sway. The nation’s biggest money manager believes that D-street is in for a tepid year ahead until the Federal Reserve terminates its interest rate tightening cycle.

Last night when the nation was asleep, the very same Jerome Powell led U.S. Federal Reserve raised its borrowing costs for the fourth time this year. Rates were hiked by 0.25 percentage points to a range of 2.25% – 2.50% by a 10-0 unanimous decision by the Fed. The rate hike was on expected lines, but the already troubled U.S. stock market made a U-turn for the worse from green territory with all three major indices ending with a deep cut well above 1%.

The Nasdaq traded 2.17% lower to end at 6637, Dow was down 1.49% at 23,324 and the S&P 500 lost 1.54% to hit its lowest level since September 2017. U.S. stocks are on pace for their biggest December decline since 1931, the depths of the great depression. The dollar gained as an immediate reaction to raising rates since it’s viewed as a safe haven for investors when interest rates are on the up. Some prominent voices were heard saying that perhaps Powell missed a trick when he raised the rate considering the state of the U.S. stock markets which have been hit hard in the recent weeks.

A slight breather for investors was the announcement that the Fed has trimmed the number of expected rate hikes in the next year from three to two thereby suggesting that there may be a pause in the monetary tightening campaign. A slight change in the committee’s statement was also noticed saying that further gradual changes may be made, instead of it being expected to be made. President Donald Trump has been airing his opinion since the last couple of days on social media trying to encourage the Fed not to raise rates and attempt to put the brakes on the economy. Fed Chair Jerome Powell made it bluntly clear that no one would influence his decision on rate hikes and followed through with his plan in spite of the President’s dovish personal stance. Unemployment in the U.S. for the month of November was 3.7%, it’s lowest since 1969, which is an encouraging sign and has led to an increase in wages, but surprisingly not led to excessive inflation which remains in check. However, growth is expected to slow in 2019 and 2020.

With U.S. interest rates being at the highest level for years, especially making a sharp come back from near zero levels a few years back, world markets are in for a bumpy ride. Especially in India, with the general elections looming close by and the Fed on a tightening cycle, many experts are advising caution with a bias towards fixed income instruments instead of equity.

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