By Mr. Ajit Banerjee, President and Chief Investment Officer at Shriram Life Insurance
As was broadly expected and factored in by the market, the Fed raised its benchmark rate by 25 basis points to 3.75%-4% on Wednesday, the first hike since 2023.
The Fed’s decision is also likely to raise calls for the RBI to raise rates in its October meeting in order to maintain the interest rate differential in place and arrest large outflow of Foreign Investors fund outflow. The CPI and Core Inflation is also on the uprise and becoming widespread.
Another Fed hike this year?
The revised dot plot showed that majority of FOMC members i.e. 16 of 18 officials projecting at least one more increase this year as inflation remains elevated. The median forecast however shows no further rate hikes next year, although 8 members favoured delivering one more hike in 2027.
The market currently has priced in a 50% probability of a rate hike as early as next month. This rate hike under the new Fed Chair has reaffirmed Fed’s credibility as an Independent Institution which hasn’t been overshadowed by Trumps calls for rate cuts. The Fed Chair also categorically mentioned that the US Economy is looking strong with strong GDP Growth , higher consumption numbers and lower job loss claims. However, Persistent US-Iran tensions and oil prices above $100 a barrel are adding to inflation risks, potentially limiting expectations for monetary easing.
