Fed policy: Rate hike off the table, FOMC meeting outcome likely to be uneventful

While the domestic stock indices saw cautious trading on Wednesday in the run up to the Fed policy review, analysts largely expects the FOMC outcome to be uneventful. The recent data points paints a positive outlook for the US economy, but the recent steep rise in US bond yields are seen tightening the liquidity situation in the world's largest economy. Some analysts believe rising yields actually acted as at least one rate hike, which makes any rate hike debate off the table.

Japanese brokerage Nomura said Fed officials appear content to let higher long-term yields serve as a substitute for further rate hikes. "We expect Powell’s press conference to emphasise the cumulative tightening that has taken place, noting that policymakers can be patient assessing incoming data. Taking into account the impact of tighter financial conditions, we maintain our monetary policy outlook that there will be no more rate hikes during the current cycle," it said.

The November FOMC meeting is likely to be uneventful, the brokerage said adding that the Fed officials have already communicated that rates will likely remain on hold, in spite of recent hawkish data surprises.

"Data since the September meeting shows surprising strength in growth and inflation. Job gains accelerated in the September employment report, and positive backward-revisions showed a more-resilient underlying trend," it noted.

As per CME Fedwatch tool,  expectations of Fed to keep rate steady at its meeting stood at 98.1 per cent.

Morgan Stanley noted that even as the Fed tightened monetary policy at the fastest pace in 40 years, it still is confronted with sticky labour and inflation data that have been obstacles to signalling a definitive end to the tightening cycle.

"At the same time, the fiscal deficit has expanded to levels rarely seen with full employment. These constraints are exactly why the Fed has indicated a "higher for longer" stance. In our view, the strength in the headline labour data masks the headwinds faced by the average company and household that the Fed can't address proactively," it said adding that while the Federal Reserve may be done hiking for now, it is a long way from easing.  

Gary Dugan, CIO  at Dalma Capital said the US Fed, while unlikely to act immediately, faces a growing pressure to address inflationary pressures in the near future.

He said while it is widely anticipated that the US Fed would keep the  interest rates unchanged, an accompanying statement subtly acknowledging the enduring strength in economic growth and inflation evident from recent data points is all likely, he said. 

 

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