The US Federal Reserve has raised its key interest rate by 75 basis points (bps), which is the highest since 1994. It comes as the inflation rate in the US is hovering at a 40-year high of 8.6 per cent, against the central bank’s target of two per cent. Here’s what investors need to know:
What is The US Fed’s Decision?
“The Board of Governors of the Federal Reserve System voted unanimously to approve a 3/4 percentage point increase in the primary credit rate to 1.75 per cent, effective June 16, 2022,” according to a statement by the US Federal Reserve.
This is the biggest hike in interest rates since 1994.
The Federal Open Market Committee directs the Open Market Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/2 to 1-3/4 per cent; to conduct overnight repurchase agreement operations with a minimum bid rate of 1.75 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair.
It also asked to conduct overnight reverse repurchase agreement operations at an offering rate of 1.55 per cent and with a per-counterparty limit of $160 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair.
“The committee seeks to achieve maximum employment and inflation at the rate of 2 per cent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent and anticipates that ongoing increases in the target range will be appropriate… The Committee is strongly committed to returning inflation to its 2 percent objective,” the US Fed said.
According to the latest data, consumer price inflation in the US increased 8.6 per cent year-on-year in May, which is the largest increase since December 1981 and followed an 8.3 per cent advance in April. The prices in the US accelerated on the back of high fuel prices and costlier food.
Here’s What Investors Should Know
Apart from raising interest rates by 75 basis points, the US Fed has also signalled aggressive rate hikes and targeted interest rates at 3.40 per cent by the end of this year. The US Fed has also reduced the growth forecast to 1.7 per cent for 2022 and also for 2023 against earlier forecasts of 2.8 per cent for 2022 and 2.2 per cent for 2023.
The US Fed also raised the inflation target for 2022 to 5.2 per cent but reduced it for 2023 to 2.6 per cent and 2.2 per cent for the year 2024.
Experts say this will keep the rupee volatile ahead and could test the 78.55 level. They said that any relief rally is unlikely to last long and in India, the sustained FPI selling is an additional headwind.
Ramkumar Venkatramani, lead (investment advisory) at global private wealth management platform Kristal.AI, said, “The spike in inflation in the US and Europe is forcing the central banks, including the US Fed, to eye a sharp increase in interest. If the Fed’s aggressive action led to a recession in the US, it can quickly spread to other parts of the world, slowing down the global growth rates.”
An economist told news18 that if Fed raises its policy rates and RBI doesn’t; in this case, the foreign portfolio investment sees outflows. So, the US Fed rate hike’s impact on the markets will also depend upon the RBI’s future actions. For now, the market is not showing any impact of the rate hike, as its impact was already factored in in the past few days. “The 75-basis-point rate hike was expected.”
The rupee strengthened by 15 paise to 78.07 against the US dollar in opening trade on Thursday after the US Federal Reserve hiked interest rate by 75 basis points and signalled more rate action to fight inflation.
Indian equity markets also opened on a positive note on Thursday morning after global markets cheered the 75 bps hike by the US Fed overnight. At 09:16 IST, the Sensex was up 506.41 points or 0.96 per cent at 53047.80, and the Nifty was up 142.40 points or 0.91 per cent at 15,834.60.
V K Vijayakumar, chief investment strategist at Geojit Financial Services, said, “Investors may follow a cautious investment strategy without taking aggressive bets. Take a long-term view and use dips in the market to slowly accumulate fairly priced high-quality stocks such as leading banks, leading IT, pharma and select autos. Increase the cash component in the portfolio to exploit any probable sudden changes in outlook and market trend.”
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