Key take aways from the FED Policy,
- US Fed increased rates by 0.75% on expected lines
- Will also keep reducing the balance sheet on expected lines BUT
- Equity, Yields & DXY all reacted negatively, why?
(Q2) Why is it important?
- Financial markets like more stability & fewer surprises.
- The dot plot tells the market in advance where interest rates could be heading in future as per the FED members.
- Though the dot plot may change with each Fed meeting, markets seem to prefer having something to work with rather than shooting in the dark.
(Q3) Why should you care?
- Over the last 2 years, the markets went up because of low interest rates & a flood of liquidity
- In a low rate regime, fixed income investing dint look interesting & hence liquidity chased Equities & markets were up.
- But now the US 2Y yield above 4% is much better than the dividend yields available on most stocks in the US & hence fixed income is looking better vs stocks in the short term
- Also if rates keep going up, it hurts consumption, real estate is starting to show some trouble in US already
- Stock valuations also get negatively impacted with rising yields
All of this warrants for us to track where rates are heading
(Q4) So what’s the current Dot Plot looking like (see the Median Column)?
- After yesterdays increase, the rate moved from 2.5% to 3.25%
- June meeting prediction was rates at 3.4% by end of 2022. September meeting median rates are 4.4%. Scope of another 1.15% rise in rates in 2022 (4.4 - 3.25)
- Rates are now expected to top out at 4.6% vs 3.8% as predicted in the June meeting
- Inflation also does not seem to come down to 2% till 2025 & hence no rate cut in 2023 as the market was expecting
- GDP projections have been reduced for 22, 23 & 24 vs June predictions
- All in all the policy was more Hawkish than the market expectations & hence risk assets reacted negatively
Closing comments,
While India will surely out perform global markets, its difficult to de couple completely. Look at domestic facing stocks likes Financials, Consumption, Auto, Utilities, Industrials etc. because the global picture will take some time as it looks like right now.
- Every dot represents each
9 are expecting it to be between 4.25 - 4.5%
1 member is expecting rate close to between 4.5 - 4.75%fed members judgment of the future rates
- If you see the below chart, it shows that at the end of 2022,
1 member is expecting rate to be 3.75 - 4%
8 members are expecting the rate to be between 4 - 4.25%
(Q1) What is a Dot Plot?
- It is an expectation (as on today) of the future interest rate movement over the next 3 years as predicted by the 19 members of the FED
Source - Kirtanshah CFP