The US Federal Reserve is holding the Federal Open Market Committee (FOMC) meeting, in which the central bank is expected to announce key decisions regarding interest rates, bond tightening, inflation guidance and more. The two-day meeting will end on Wednesday.
What could Fed do this time?
At the very least, the Fed is expected to hike interest rates by 25 basis points in an attempt to tackle the rising inflation while also securing the US economy from the shock of the Russian invasion of Ukraine and the resulting increased fuel prices. The Fed will also release the latest Summary of Economic Projections (SEP), which contains future projections from the Fed on key numbers like unemployment, gross domestic product and inflation. The central bank will also share its guidance on how it will be going about the quantitative tightening programme.
What could it mean for the market?
An increase in rates will certainly lead to some divestment from riskier assets like commodities and equities, especially with global markets in turmoil due to the ongoing Russian invasion of Ukraine. Regardless, more volatility is in store as markets adjust to the interest rates as well as future projections.
How many rate hikes are expected this year?
While analysts had been predicting anywhere from 6-7 rate hikes in the year, these predictions were made before Russia’s war. Now with the spectre of consumer spending declining as a result of higher gas prices, which could result in economic shrinkage, the Fed has to be more cautious before raising its interest rates multiple times in the year.
What will it be its impact on India?
Higher interest rates in the US result in foreign investors pulling their money from emerging markets like India back to the US for safer, and more secure returns. This capital flight puts significant pressure on the Reserve Bank of India to hike interest rates in turn, or face the rupee weakening significantly against the dollar, which again would lead to imported inflation for India.