US Fed policy outcome: Nomura analysts sees a ‘hawkish pause’ but said that would unlikely to dampen market sentiment. It believes the terminal rate may have been reached. 
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US Fed policy outcome: Nomura analysts sees a ‘hawkish pause’ but said that would unlikely to dampen market sentiment. It believes the terminal rate may have been reached. The US central bank is likely to announce a pause on policy rate hikes at 11.30 pm IST today. Market analysts said while the vote could be in favour of a pause, it would unlikely to be unanimous decision as a couple of hawks are likely to dissent. They are also unsure of whether the pause will accompany a hawkish tone.
What is boosting hopes of a pause later today is the data released earlier this week that suggested US consumer prices barely rose in May and the annual increase in inflation was the smallest in more than two years. To recall, the Federal Reserve Chair Jerome Powell recently said the interest rates had entered into a restrictive territory and that the central bank would wait for the cumulative rate hikes of 500 bps to circulate completely through the economy. Minutes of May policy review also hinted at a split among the members for further rate hikes.
"Besides, slack in the labour market is observed from the jump in the recent initial jobless claims. Hence, higher unemployment rate paired with moderations in inflation rate is expected to turn the Fed to hold rate in June meeting. Moreover, we continue to believe that rate cut is off the table for CY2023 and hence “higher for longer” will continue as inflation will remain above Fed target range of 2 per cent," Centrum Broking said.
Nomura analysts sees a ‘hawkish pause’ but said that would unlikely to dampen market sentiment. It believes the terminal rate may have been reached, as the lagged effects of tighter credit conditions will likely lead to a recession and gradual disinflation.
"Given market pricing through July (cumulative 21 bps hikes priced in through July FOMC), we do not think this scenario should necessarily dampen sentiment towards stocks beyond any initial knee-jerk negative reaction," it said.
Manish Chowdhury Head of Research at Stoxbox said the calls for a rate pause have got louder following a sharp slowdown in consumer price inflation released this week.
"We believe that the US Fed would breathe a sigh of relief as the core point of discussion i.e. inflation is moving to a lower trajectory and provides the central bank a leeway to adopt a “wait and watch” approach to its hawkish monetary policy," he said.
Investors would closely monitoring the post-meeting commentary from the Fed Chair, Jerome Powell, for signs of a pivot to rate hikes. Additionally, the central bank’s reading of the financial stability and a probable slowdown in economic growth would be eyed for gauging the use of further ammunition by the Fed at its next policy meeting in July, Chowdhury said.
Centrum Boking said Federal Reserve's economic projection is another wait and watch. The median dot plot is likely to reveal a wider spread in fed funds rate expectations, it said.
"In this meet, revised outlook will get revealed, which encompasses forecasts for GDP, unemployment, PCE and interest rates. Hence, combining the current situation of the US labour market, inflation dynamics and steady signs of economic growth, it is highly unlikely that Fed will sound hawkish in this meet. Specially, at a time when the economy is showing initial signs of turnaround," it said.
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