Fed hikes rates but acknowledges uncertainty; peak in rate hiking cycle?

What's Buzzing 

The Fed hiked its interest rates by a smaller magnitude but signalled a pause in its monetary tightening drive. 

Context 

The US Federal Reserve raised its interest rate for a ninth consecutive meeting taking the range between 4.75% and 5.0% but signalled an end to its rate hike campaign sooner. By raising quarter percentage point it has taken it to the highest level since September 2007. The latest increase was smaller than the 50 bps increase that the market was anticipating before the bank collapses shook markets. Additionally, the FOMC also continued its tightening of balance sheet as announced in May 2022. 

Our Perspective 

We expect the US Federal Reserve to take a backseat and pause its tightening plans as a year of rapidly tightening financial conditions is finally hitting the financial sector. Even Mr Powell’s statements and change in forward guidance language indicates that there could be less need for the Fed to hike rates. Additionally, Fed Chair Powell said policymakers had consider skipping rate hike after banking stress intensified. Moreover, US Treasury Secretary Janet Yellen said she has not considered or discussed anything having to do with blanket insurance or guarantees of deposits. The Fed may have to change its stance considering the lag effect of the full effects of the rate hikes to ripple through the economy and on recent worries over a fallout in the banking sector and contagion concerns stemming from troubles at Silicon Valley Bank (SVB). We see the peak in the rate hiking cycle and expect a rate cut in the second half of the year. 

Considering the change in stance from the Fed, we believe the downward journey in the dollar may continue. We expect the Dollar Index to eventually move below the psychological level of 100. 

US$INR is facing strong resistance near 83.00 and failed to breach these levels for a couple of months. Moreover, with recent expected weakness in the dollar coupled with softening of crude oil prices, we believe it may appreciate towards 81.00 in the coming months.