On the 27th of July, the FOMC issued its statement after the conclusion of the 2 day meeting of the Federal Reserve members. Even before the FOMC meet began, the debate was all about whether the Fed would hike the rates by 75 bps or by 100 bps. Eventually, the FOMC decided to settle for 75 bps in the FOMC meeting of July 2027. 

However, it would be too early to celebrate and that is principally for two reasons. Firstly, even behind the veneer of this relatively mild 75 bps rate hike, the hawkishness is almost intact. Fed would not hesitate to hike rates by another 75 bps in September if the situation demanded. Secondly, Jerome Powell is unperturbed by recession fears and holds on to the view that labour robustness matters more than the risk of GDP slowdown.

7 key takeaways from the FOMC statement on 27th July

The Fed is willing to stick its neck out on rate hikes even if it means causing a recession. That is the scary part. Here are key takeaways.

a)Despite having hiked the rates by 225 bps since March and 150 bps between June and July, Powell has not ruled out further rate hikes. Powell went as far as suggesting that he would not hesitate another 75 bps rate hike if the inflation situation so warranted. This is the most hawkish that the Fed has ever been since the Volcker era of early 1980s. 

b)However, that hawkishness is partially mitigated by the stream of pragmatism coming from Powell. He has admitted that going ahead, the Fed would be more data driven. Now this may sound to be at cross purposes with his patent hawkishness but clearly we have to await the 2 inflation and employment readings before the September meeting. 

c)One ideas that has been oft discussed is the neutral rate. At the current range of 2.25%-2.50%, Fed rates are already at neutral levels. Typically, the neutral rate is a level which neither speeds nor slows down the economy. But, from now on, every rate hike would be directly having a negative impact on GDP growth. Pressure is already visible.

d)One major dichotomy in perspective appears to be that the Fed is relying more on the strength in the labour market to assess the robustness of the US economy. The markets, on the other hand, are focusing on GDP growth estimates, especially the real time GDPNow estimates of the Atlanta Fed. That makes a consensus less likely.

e)Fed has made an interesting statement that it would be “highly attentive to inflation risk”. It would not relent on rate hikes till inflation gravitated close to the 2% mark. While the Fed has chosen to focus on inflation control, the central bank has also committed to adjust the trajectory should visible risks to growth emerge.

f)Some of the indicators are not too encouraging. Agreed that labour data is still strong but high rates are slowing down the sales in the housing market. Q1 has seen GDP contraction and Q2 is likely to be flat at best and contract in a worst case scenario. A key indicator, the yield curve, has already inverted in the US for the third time.

g)Finally, that brings us to the million dollar question; is a soft landing really possible as the Fed envisages. In a way, Fed is confident that higher inflation would constrict spending and kill inflation. However, markets are apprehensive that it will actually take recession with mounting unemployment to slow inflation; a huge cost to pay.

Fed wants to deliberately slow demand and growth so that it creates some slack in the economy and give supply a chance to catch up. The last word is yet to be said.

India has some reasons to be concerned about

Suddenly, hawkishness is the name of the game. In recent days, even the ECB has joined the hawkish club by hiking rates by 50 bps. Of course, India hiked rates by 90 bps and CRR by 50 bps for amplification. If the Fed goes ahead and hikes rates by another 100-125 bps (as it looks very likely) it could create a short term conundrum for the Indian markets. India cannot afford to kill growth and spending like the US or Europe can afford to do.

If you look at the latest IMF projections, it has laid out a subdued growth for India and the world in 2023 and 2024. The larger externalities of a slowdown in the US and China is that India’s global trade would get impacted. India has managed with FPI outflows for over 9 months with not a very deep impact on the equity markets. The tougher job will be in the next few months, if the US chooses to be relentless in its anti-inflation tirade!