The US Federal Reserve has been increasing interest rates since March 2022, pushing the federal funds rate from near zero to between 4.75% and 5% in just one year. With the job market still strong and inflation high, the Fed is expected to hike rates by another 25 basis points (bps) on May 3.
Despite cooling off a bit, the Fed’s goal to fight inflation remains firm. They were expected to keep raising rates until July, but the recent banking crisis might cause a pause after May’s hike.
Another 25 bps Hike in May?
The US job market is still tight, which is a strong sign that the Fed will raise rates again in May. In March, the unemployment rate was 3.5%, indicating a resilient labor market. Although annual wage growth slowed, it remains too high to meet the Fed’s 2% inflation target. The Consumer Price Index (CPI) rose 0.1% in March and was up 5% year-on-year, still above the target.
The Fed’s decisions depend on economic data, and it seems there’s room for at least one more rate hike, despite recession fears. VK Vijayakumar from Geojit Financial Services expects a 25 bps hike in May, followed by a pause. Shrey Jain of SAS Online and Sandeep Jain of Trans Scan Securities also predict a 25 bps hike.
Impact on the Indian Market
The expected rate hike in May is unlikely to significantly impact the Indian market since it’s already anticipated. However, the Indian stock market is sensitive to global events, and US rate hikes can make US assets more attractive, leading to a shift from emerging markets like India to the US.
If the Fed hints at a pause after the May hike, US markets might rally, positively affecting Indian markets. But the Fed seems divided on future rate hikes, adding uncertainty.
Sandeep Jain of Trans Scan Securities believes the rate hike is already priced in by the Indian market. However, a reduced rate differential between the US and India could negatively impact currency trade. The Reserve Bank of India (RBI) might raise rates to prevent capital outflow and support the Indian rupee.
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