US Federal Reserve hikes interest rates by 0.5; domestic markets open flat

The Federal Reserve won't cut rates until inflation falls to 2% in a sustained way

ITDC INDIA EPRESS/ ITDC NEWS The U.S. Federal Reserve hiked key interest rates by 0.5% on Wednesday, a smaller increase compared to the recent months, thereby suggesting that the inflation in US may finally be cooling off. 

But, it warned that the hike rate will continue in 2023, as a means to control the rapid price rise as the country battles the worst inflation in four decades. The interest rates now stand at 4.25% - 4.5% - the highest rate in 15 years. But, the 0.5 % hike is still lower than the four consecutive 0.75% hikes approved at the Fed's previous meetings.

According to Federal Open Market Committee, it expects to target an inflation rate of 2% over the long term, necessitating rate increase. "Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures," the committee said.

The central bank estimates the prices to rise 5.6% this year and 3.1% next year, higher than its previous forecast of 2.8%. They also expect the US economy to grow by just 0.5% next year while the unemployment rate may rise to 4.6%.

"Our focus right now is really on moving our policy stance to one that's restrictive enough to assure a return of inflation to 2% goal over time. It's not on rate cuts," Powell said. "And we think that we'll have to maintain a restrictive stance of policy for some time. Historical experience caution strongly against prematurely loosening policy. I wouldn't say we're considering rate cuts," he added.

Domestic markets fall

This reflected in the domestic market too Indian shares opened flat on Thursday morning. The 30-share BSE Sensex declined 186.74 points to 62,491.17. The broader NSE Nifty dipped 51.95 points to 18,608.35,

Not just in domestic market, the majority of the key indices across the world’s stock exchanges were also trading in the losses during morning trade. Equity markets in Seoul, Tokyo, Shanghai and Hong Kong were also trading lower.

As for the US, markets were higher before the Federal Reserve annoucement came but fell after predictions of slower economic growth and higher unemployment and inflation rates for 2023.

"The bearishness can be attributed to the US Fed's hawkish comments that indicated it will keep rates higher through next year," Prashanth Tapse - Research Analyst, Senior VP (Research), Mehta Equities Ltd,

Equity markets are currently watching out for European Central Bank and Bank of England decisions today, which are also likely to be 50 basis points hikes.

"The Indian market, though not completely decoupled from the mother market US, has been charting a slightly different path exhibiting surprising resilience even in the face of global weakness. This is due to India's superior growth and earnings prospects, going forward," V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services told PTI.

The BSE benchmark had climbed 144.61 points or 0.23 per cent to settle at 62,677.91 on Wednesday. The Nifty had advanced 52.30 points or 0.28 per cent to end at 18,660.30.