Fed Meet | 275-300 | 300-325 | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 |
Sep-22 | 65.0% | 35.0% | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil |
Nov-22 | Nil | 53.4% | 40.4% | 6.2% | Nil | Nil | Nil | Nil | Nil | Nil |
Dec-22 | Nil | 33.0% | 45.3% | 19.3% | 2.4% | Nil | Nil | Nil | Nil | Nil |
Feb-23 | Nil | 25.7% | 42.6% | 25.0% | 6.1% | 0.5% | Nil | Nil | Nil | Nil |
Mar-23 | 10.8% | 32.8% | 35.2% | 17.1% | 3.8% | 0.3% | Nil | Nil | Nil | Nil |
May-23 | Nil | 10.8% | 32.8% | 35.2% | 17.1% | 3.8% | 0.3% | Nil | Nil | Nil |
Jun-23 | 10.8% | 32.8% | 35.2% | 17.1% | 3.8% | 0.3% | Nil | Nil | Nil | Nil |
Jul-23 | 10.0 | 31.2% | 35.0% | 18.4% | 4.7% | 0.6% | Nil | Nil | Nil | Nil |
The first meeting of the US Federal Reserve concluded on 01st February 2023. Indian investors cannot be blamed for missing the Fed statement in the midst of the flurry of activity caused by the Union Budget and the Adani Enterprises FPO cancellation. However, the Fed has stuck to its promise of slowing on rate hikes and has hiked rates by just 25 bps. This takes the rates to the range of 4.50% to 4.75%. Effectively, since March 2022, the Fed has hiked rates by a full 450 basis points. Fed has also affirmed that it sees another 2 rates hikes of 25 bps each taking the terminal rate to the range of 5.00% to 5.25%.
In the December 2022 Fed meet, the Fed had hiked rates by 50 bps, a slight departure after 4 consecutive meetings had seen 75 bps rate hike each. Now the February meet has further reduced its rate hike intensity to 25 bps. While the inflation has shown signs of coming down, the Fed would still be observing the core inflation data closely and also focusing on the labour data, which has been too strong for far too long.
A quick detour to what the CME Fedwatch is saying
CME Fedwatch reflects implied probabilities of future rate hikes based on Fed futures pricing. The table below captures the live probabilities of different rate levels after the various Fed meets in year 2023.
Fed Meet | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 | 525-550 | 550-575 | 575-600 |
Mar-23 | Nil | Nil | Nil | 17.3% | 82.7% | Nil | Nil | Nil | Nil |
May-23 | Nil | Nil | Nil | 10.5% | 56.8% | 32.8% | Nil | Nil | Nil |
Jun-23 | Nil | Nil | Nil | 10.0% | 54.8% | 33.8% | 1.4% | Nil | Nil |
Jul-23 | Nil | Nil | 2.5% | 21.1% | 49.6% | 25.7% | 1.0% | Nil | Nil |
Sep-23 | Nil | 1.0% | 9.9% | 32.5% | 40.1% | 15.8% | 0.6% | Nil | Nil |
Nov-23 | 0.4% | 4.7% | 19.3% | 35.7% | 30.0% | 9.5% | 0.4% | Nil | Nil |
Dec-23 | 4.7% | 17.9% | 34.1% | 30.5% | 11.5% | 1.25% | Nil | Nil | Nil |
Data source: CME Fedwatch
One thing is evident that the market is becoming less hawkish with the passage of time and to that extent, the Fed has surely managed a smooth communication with the markets. Now, the CME Fedwatch is also hinting at a worst case hike of another 50 bps from here. Here are some key takeaways from the CME Fedwatch probabilities.
Two things emerge from the CME Fedwatch. The US central bank is still not done with hawkishness; at least till the impact on inflation is palpable. Secondly, the probability of a broad-based recession in the developed world is gaining ground.
What we read from the Fed statement
Here are some key takeaways from the Fed statement issued post the FOMC meet, late on 01st February 2023.
One thing emerges from the Fed statement. This may not be the end of rate hikes, but it is surely the beginning of the end of rate hikes in the US. A lot will depend on inflation levels.
What are the takeaways for the Indian markets?
A key factor in this entire equation is how the RBI reacts to the Fed statement. For now, it looks like the RBI may pause in February and keep the options open for another 25 to 50 bps rate hike in subsequent policy statements. Fed stance has not been too clear, but it looks like the Fed may be just about 50 bps away from the terminal peak rates of interest. That is good news for the Indian markets as it circumscribes the overall risk.
In terms of FPI flows, the outflows have again resumed since the start of January 2023 with FPIs selling more than $3.52 billion in the first month of 2023. For now, liquidity is a concern and some toning down of valuations may be on the cards. For India it is time to focus on policies that are a lot more inward looking. A flow policy that is risk-off versus risk-on dependent is not going to work for India in the long run.
Ahead of the FOMC statement on 27th July, the debate was centred around whether the Fed would hike rates by 75 bps or 100 bps.