Key takeaways from the Fed minutes announcement

The US Federal Reserve released the minutes of the FOMC meeting exactly 21 days after the Fed statement. With the Fed statement released on 02nd November, the Fed followed it up with detailed minutes of the discussion on 23rd November. Incidentally, the RBI releases the MPC minutes on the 14th day after the RBI policy statement. The minutes were eagerly awaited since it would set the tone for the future Fed policies. Also global markets (including the Indian market) were awaiting the Fed minutes to get a picture of how FPI flows and the future interest trajectory would pan out.

Broadly, the Federal Open Markets Committee (FOMC) conveyed two themes through the minutes released on 23rd November. Firstly, the Fed has indicated in no uncertain terms that the pace of rate hikes in the future Fed meetings would most likely slow down. In a way, that was also understandable considering that there had been 4 consecutive rate hikes of 75 basis points each; with an overall rate hike of 375 bps since March this year. The second theme of the Fed minutes was that the eventual terminal rate would be higher than the original 4.6% and would gravitate to the range of 5.25% and 5.50%.

Quick snapshot of future rate hikes by the Fed

Here is a quick snapshot of how the rates are likely to move in the coming few Fed meetings in 2023. The 50 bps rate hike in December is almost factored in. The table below captures where the probabilities as measured by the Fed Futures implied probabilities are gravitating.

Some quick inferences we can draw from the table above.

• Fed is hinting at a peak rate target in the range of 5% to 5.5%, with a high bias for the terminal rates to settle somewhere in between these two levels.

• The probabilities compared to the Fed statement show a clear fall in probabilities of rapid rate hikes, indicating that Fed would move slower from here on.
   

• The action of the Fed from here would be largely data driven. If inflation starts moving down faster than expected, then the Fed may opt to apply the brakes on rate hikes or even consider reducing rates at the margins.
   

• While a 50 bps rate hike in December is almost a given, further rate hikes are unlikely to be beyond 25 bps each. A lot will now predicate on how quick and how qualitatively the inflation trends lower.

Uncertainty is the only certainty about US economy

That is the bottom line. Things are still too uncertain to call a trend. However, the broad consensus appears to be that the worst in terms of sharp rate hikes may be done and dusted for now. Going ahead, rate hikes would be more subdued. For now, the Fed does not see inflation abating too rapidly with the first signs of falling inflation likely to be visible only in 2023. The good thing is that the Fed will not wait for inflation to reach the target of 2% to act on the dovish side. If there is a clear movement towards lower rates, that would be good enough reason for the Fed to apply the brakes on rate hikes.

In a way, the Fed is buying time. They would now prefer to take a comprehensive view of the US economy including rates, inflation, liquidity and GDP growth. At the start of 2022, a single-minded obsession with inflation made sense, but not any longer. Even if we assume 50 bps rate hike in December 2022 and a possible terminal rate of 5.25% to 5.50%; that would still call for 3-4 rate hikes in the year 2023. As Jerome Powell summed it up best, “There is risk in both directions; in doing too little and also in doing too much”.

What do these minutes bode for India Inc?

For the Indian markets, there are 3 positive takeaways from the minutes.

1. Firstly, the pressure on the RBI to hike rates is likely to reduce and December RBI MPC meet would be a good test of how the RBI reacts. This may be the last tranche of rate hikes by the RBI.
    

2. In terms of FPI flows, this move should be positive as it maintains the gap between the real yields in the US and in India. Incidentally, real yields in the US are negative while in India it is positive.
    

3. Lastly, this move is positive for the Indian rupee as it reassures the RBI that the dollar strength pressure should abate from these levels. That should be good news.