US Fed Policy: 50 basis points hike is priced-in; guidance on GDP, unemployment, terminal rate to hold key, says expert Ajay Bagga

Federal Open Market Committee (FOMC) of the Federal Reserve will begin on Tuesday, 13 December where the US Central Bank is expected to raise interest rates by 50 bps. Market expert Ajay Bagga in chat with Zee Business Managing Editor Anil Singhvi said that the markets have priced in the impact of the interest rate hike.

The two-day meeting will be followed by a monetary policy speech by Chair Jerome Powell and a press conference.

Bagga said that a 50 bps interest rate hike will also be made by European Central Bank and Bank of England on 15 December 2022, Thursday.

The important thing in this will be the forward guidance given by Fed which is a summarized economic projection, Bagga added. This will give a guidance on next year GDP, unemployment and terminal rate which will indicate at what point the pivot will come.

The indications are that November inflation will cool like it did in the previous month, Bagga further said.

Demand tightening in the economy has already started, he opined adding that the hikes have been significant and the impact of it comes with a lag. It shows impact in 3-6 quarters. The Central Bank started increasing rates in March and a significant part of it was undertaken over the last three months. The real impact of this will start showing from March and there will be slowdown.

There is a view that recession will come in US while others are of the view that inflation will come into control as a result of this slowdown, Bagga said.

The inflation will now see a downward trend which is a big positive, he said adding that the subsequent rate hikes are expected to be small and to the tune of 25 bps in 1 February and 22 March FOMC. If need be, the Fed could further increase policy rate by 25 bps in May, he said.

Fed has brought interest rates from zero to 3.75 per cent which will further go up to 4.25 per cent on 14 December, Bagga said.

This is unprecedented and the rates are now going towards the highs of 2007.

After this one can expect a renewed buying sentiment in the US which will have a positive impact on Indian markets, Bagga concluded.

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Meanwhile, US frontline indices were trading positive ahead of the meeting. Dow 30 was trading at 33,638.10, up 161.65 or 0.48 per cent at the time of filing the story.  S&P 500 was trading at 3,947.16, up 12.78 points or 0.32 per cent while Nasdaq Composite was trading at 11,035.20, up 30.55 points or 0.28 per cent.