Fed’s dovish hold on rate is a tell-tale for RBI’s future action

The Federal Reserve committee’s recent meeting concluded without any change in interest rates. Although the commentary provided mixed signals, growth forecasts have been revised upwards, indicating a better outlook for the US economy. However, inflation remains higher than anticipated, and a rate cut will likely be in June. An immediate outcome of the meeting was that the US dollar declined and international gold prices touched new highs. As regards India, the question that is on everyone’s mind is about the possible direction the interest rate will move. While fundamental backdrop of lower interest rates and geopolitical uncertainty looks supportive for gold, some profit-booking can be done at these levels and fresh buys can wait for price dips. The Fed has signalled that it remains on track to cut interest rates by 75 basis points in 2024, easing market concerns of fewer rate cuts amid recent data showing sticky inflation. Chair Powell’s remarks indicate that the Committee is still eyeing a June rate cut as the economy continues to make ‘good progress’ overall, and it likely would take a further run of the unexpected firm inflation to delay easing.

The longer-run median policy rate was nudged up as well. These policy projections came against upwardly revised '24 macro forecasts and now above-potential growth through 2026 plus a steady unemployment rate around four per cent. But Powell had the final word in the presser and his overall message was dovish as it reiterated a June cut. He confirmed comfort on macro variables stating that recent strong inflation readings didn’t fundamentally change the expectation for inflation to continue to gradually cool. The only notable change to his prepared remarks was to flag unexpected potential weakness in the labour market as a cause to cut rates, while he himself shrugged those labour fears as likely. He also said that it would be appropriate to scale back QT ‘fairly soon,’ but noted no balance sheet decisions were made. Even as Powell has directed at a June cut, Emkay stays wary of taking Fed on face value. It reckons the possible error of judgement by DM policymakers on inflation transience and permanence post-Covid, has its roots in the fact that macro models are based on past-decadal trends, while the new structural shifts are yet to be incorporated.

Experts wonder if it is time to reassess one’s faith in central banks’ guidance post-pandemic, and take a fresh look at the underlying trends that suggest a near-term constructive growth outlook, sticky inflation, and limited DM easing. Analysts see a high probability of ‘No Fed cuts’ in 2024, as they struggle to get to the last mile of disinflation. This will soon spill over to emerging market central banks, including the Reserve Bank of India. But unless it is accompanied by immediate negative growth shocks analysts don’t see a crash in EM risk assets, and believe that the cherry-picking theme will work well for Indian assets, specifically INR and Indian bonds.