What the FED Meeting Outcome Mean for Global and Indian Markets?

When the meeting of the Federal Open Markets Committee (FOMC) concluded on 22nd September, nothing really conclusive was really expected. To that extent, the FED did not disappoint.

FED chair, Jerome Powell, refrained from making any commitment on the timelines of the taper or on interest rate hikes. However, Jerome Powell did indicate that the “Taper may soon be warranted”. That was as ambiguous as it could get.

There are two events that may have triggered this statement. Firstly, the US is still contending with the debt ceiling and is unlikely to make any commitment on taper till that is resolved.

Secondly, with Evergrande of China on the throes of bankruptcy, there is a pall of uncertainty surrounding global markets. The statement is intended to give the FED an escape route, should the global market situation worsen in the coming weeks.

The FED has constantly harped on two key factors to decide on the taper and the rate hike; inflation and full employment. For August, the headline inflation was 5.3% with core inflation at 4%, well above the FED target of 2% inflation.

However, FED considers this inflation spike driven by transitory factors and should taper once supply lines are restored. Joblessness at 5.2% is still way above pre-COVID rate of 3.5%, indicating lakhs of missing jobs.

Tapering will depend on substantial further progress on inflation and labour data. That is still elusive. Till the time joblessness gets to 3.5%, FED is unlikely to consider rate hikes and till the Evergrande issue and debt ceiling is resolved, there will likely be no tapering.

For global markets, it means a semblance of stability for now. India stands to benefit in 3 ways. Firstly, the liquidity flows will continue as tapering look still some time away with indications only likely in November.

Secondly, delayed tapering and rate hikes mean rupee will remain strong, or at least stable for the time being. Above all, it gives Indian economy more time to set itself on an assured growth path by year end.

In economics, quite often, doing nothing is the best decision. The FED appears to have perfected that art!

Also Read: Will the Indian Rupee be Under Pressure this Week?