The US Federal Reserve is expected to raise the key interest rate for the second time in 2018 when its two-day meeting ends on Wednesday. The projected rate hike comes in the backdrop of a sharp uptick in hirings alongside a rising inflationary trend in the US economy, with the consumer inflation readings on both the headline and core (excluding energy and food components) expected to run well above the Fed’s target of 2 per cent. Analysts expect a quarter-point hike in interest rates with a possible projection of more increases this year.
The Fed’s policy statement and fresh economic projections are due to be released at 2 pm EDT (11.30 pm IST) Wednesday, Reuters reported. Fed Chairman Jerome Powell will hold a press conference half an hour later.
A Fed rate hike could potentially impact the macroeconomic outlook in other emerging economies, including India. The RBI’s Monetary Policy Committee, which hiked the repo rate by 25 basis points in its meeting last week, effectively signalling a reversal of the easy money policies of the last three years, seems to have been partly prompted by the Fed’s rate action. Following the RBI rate hike, foreign investors can retain their arbitrage advantage. Had the RBI kept the rate unchanged while the Fed hiked them further, there would have been greater capital outflows, leading to further weakening of the rupee. India’s debt and equity markets witnessed outflows of over Rs 40,000 crore in April and May.
Equity market performance has varied across regions, with the Advanced Economies (AEs) clocking modest gains on strong first quarter earnings and abating of trade tensions, while stocks in major Emerging Market Economies (EMEs) have faced selloffs on a rising dollar and expectations of further rate hikes by the Fed.
The US 10-year sovereign yield crossed 3% in mid-May on strong economic data and expectations of tighter monetary policy and fiscal expansion, but softened subsequently, according to RBI data. Across most EMEs, however, bond yields have risen on lower foreign appetite for their debt due to growing dollar shortage in the global market and on prospects of higher interest rates in AEs.
In the currency markets, the US dollar touched its highest level in May since December 2017. The euro slid significantly against the dollar reflecting a combination of factors, including tepid growth data for the Euro Area, and political uncertainty in its southern periphery, including Italy. EME currencies have, by and large, depreciated against the US dollar.