2 days ago
Fed Rate Decision May Pressure Stocks, Gold, and Rupee
The US central bank is expected to decide whether to raise interest rates on September 16.
Many experts think it may increase rates by 0.25 percentage points.
They are concerned because prices are still rising faster than the Fed’s long-term goal.
Higher oil prices could make inflation stay high.
Higher US rates can make stocks less attractive because borrowing becomes more expensive.
Gold could also weaken because investors may prefer assets that earn interest.
The Indian rupee could lose some value if the US dollar becomes stronger.
However, India’s foreign-exchange reserves may help reduce the pressure on the rupee.
The Federal Reserve is expected to announce its policy decision on Wednesday, September 16, alongside updated economic projections and the Fed Dot Plot.
Most experts cited expect a 25-basis-point rate hike after the central bank held rates between 3.5% and 3.75% at its previous meeting.
Persistent inflation and higher crude oil prices linked to renewed US-Iran tensions are increasing pressure on the Fed to tighten policy.
A rate hike could initially weigh on stocks, particularly growth shares, while potentially weakening gold as yields and the dollar rise.
The Indian rupee may face pressure from stronger US yields and the dollar, although India’s foreign-exchange reserves could limit the decline.
- Who
- The US Federal Reserve and its Federal Open Market Committee are making the decision; investors in stocks, gold, and the Indian rupee are watching.
- What
- The Fed is expected to announce its monetary policy, potentially including a 25-basis-point interest-rate hike and updated economic projections.
- Where
- The decision will be made by the US Federal Reserve and could affect global markets, including India.
- When
- Wednesday, September 16.
- Why
- Persistent inflation, higher crude oil prices, and renewed tensions between the United States and Iran are increasing pressure for tighter policy.
Rate Hike Supports Inflation Control
Rate Hike Risks Market Pressure
Need for tighter policy
Rate Hike Supports Inflation Control
Accelerating core CPI and inflation above the Fed’s 2% target make a rate hike difficult to avoid, according to the analysts cited.
Rate Hike Risks Market Pressure
A hike could increase borrowing costs and raise concerns about further tightening, potentially weakening economic and market conditions.
Stock-market reaction
Rate Hike Supports Inflation Control
If the Fed presents the move as a one-off action, any stock-market sell-off could be limited.
Rate Hike Risks Market Pressure
Higher rates and discount rates could pressure equity valuations, especially in growth sectors.
Rupee outlook
Rate Hike Supports Inflation Control
India’s adequate foreign-exchange reserves could limit the rupee’s decline.
Rate Hike Risks Market Pressure
Stronger US yields and the dollar could reduce the appeal of emerging-market assets and pressure the rupee.
Key facts
- Expected decision
- Most experts cited expect a 25-basis-point interest-rate hike.
- Previous rate range
- The Fed last kept benchmark rates between 3.5% and 3.75%.
- US PCE inflation
- The preferred inflation gauge rose 3.7% year-on-year in July.
- US CPI inflation
- August CPI increased 3.4% year-on-year and 0.3% month-on-month.
- Market pricing
- Markets were pricing a 70% probability of a rate hike, according to Madhavi Arora.
- Gold impact
- Gold could weaken if higher rates lift real yields and the US dollar.
- Rupee impact
- The rupee could face pressure, although India’s foreign-exchange reserves may provide support.
Quotes
Chris Zaccarelli
Chief Investment Officer at Northlight Asset Management
“Anyone who was hoping for a cooling – or at least moderation – of core CPI will be sorely disappointed. With a 0.3% month-over-month increase in core CPI, the Fed now finds itself with its back against the wall.”
livemint.com
Madhavi Arora
Lead Economist at Emkay Global Financial Services
“An acceleration in core CPI is likely to push the Fed to hike. Markets are pricing in a 70% probability of a hike at the moment, with a hike in October being priced in fully.”
livemint.com
Justin Khoo
Senior Market Analyst for APAC at VT Markets
“For stocks, a 25-basis-point increase would raise financing costs and could put upward pressure on discount rates, which is generally negative for valuations, especially in growth sectors.”
livemint.com
Sources
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