Fed meeting outcome today: Will Powell play Santa?

NEW DELHI: As the US consumer price inflation slowed more than expected to 7.1% in November, the market is pricing in an 80% probability of a moderate 50 basis point rate hike by the US Federal Reserve at the end of its two-day meeting tonight.

The keenly awaited outcome of the Fed meeting would be announced by the US central bank at 12:30 am IST followed by a press conference by Fed Chair Jerome Powell at 1 am.

According to the CME Fedwatch Tool, markets are pricing in 80% chance of a 50 bps-rate hike while only 20% traders fearing a harsher hike of 75 bps in the last meeting of the Federal Open Market Committee (FOMC) of 2022.


Any hike lower than 50 bps will be taken as positive for risk assets like EM equities, including Indian equities.

"Even with a 50 bps-hike, if the Fed Chairman comments that future action of the Fed will be data dependent, the market will take it positively. But, if he mentions that inflation remains a major risk and the labour market remains tight, with a possibility of a second round impact on inflation from the tight labour market, then the markets might react negatively," said Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS.


Equity markets heaved a sigh of relief after the US recorded November inflation at 7.1% – lower than consensus estimate of 7.3% and the previous reading of 7.7%.

"The Fed Chief had earlier said that he might go slow on hiking rates. This might soon become a reality now. We expect that this can fuel an early Santa Claus rally in the US and global equity markets," said Apurva Sheth, Head of Markets Perspective & Research, Samco Securities.

However, analysts say it would be premature for the Fed to signal a change in policy stance as other indicators are still above the comfort level.

With the market having already discounted a 50 bps-rate hike, analysts would be giving more weightage to Powell's commentary around future rate hikes in 2023.

"It is likely that FOMC will talk about having to stay at high interest rates for a longer period than the markets are hoping for. Then there will be nuances which will drive sentiment. The CPI numbers were quite benign, showing decelerating inflation," said Arvind Sanger, Managing Partner, Geosphere Capital.

There are expectations that the Fed may further downshift to 25 bps hikes in February and March and then put policy on pause.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)