US Fed hikes rate again, pressure on Rupee builds-up

Key Highlights:

• US Federal Reserve decided to raise interest rate by 75 bps to a range between 3.75% - 4.00% and signalled intention to keep raising them
• Central bank signalled that the magnitude of the hikes may be smaller but may ultimately move to higher levels than anticipated
• Federal Open Market Committee decided to continue with its balance sheet reduction as announced in May 2022
• US Federal Reserve Chair Powell warned that reducing size of rate increase didn’t mean the Fed thought it was close to pivoting away from raising rates. It is very premature to be thinking about pausing

Guidance on Inflation and Economic activity:

US Federal Reserve Chairman Jerome Powell said that the economy has slowed significantly from last year’s rapid pace. Recent indicators reflect modest growth of spending and production. Growth in consumer spending has slowed, activity in the housing sector has weakened significantly, in large part reflecting higher mortgage rates and higher rates and slower output growth is weighing on business fixed investments.

The labor market continued to strengthen and is extremely tight. Unemployment rate is near 50-year low, job vacancies still high and wage growth has elevated. Employment rose by an average of 289,000 jobs per month over August and September.

US Federal Reserve Chairman Jerome Powell said inflation remained well above longer run goal of 2%. Price pressures remain evident across a broad range of goods and services. Russia’s war against Ukraine has boosted prices for energy and food and has created additional upward pressure on inflation.

Monetary Policy statements:

The invasion of Ukraine by Russia is causing tremendous human and economic hardships. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation rate of 2% over the longer run. In support of these goals, the committee decided to raise target range for the federal funds rate from 3.75% to 4.00% and anticipates that ongoing increases in the target range will be appropriate.

In determining the pace of future increases, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the plans for reducing the size of the Federal Reserve’s balance sheet that were issued in May.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.

View on Dollar Index and Rupee:

Dollar Index may continue with its positive bias as US Fed decided to raise interest rate by 75 bps, for 4^th consecutive month and signalled that it would continue to lift rates this year to combat inflation which is running hot. Further, Fed warned that reducing the size of rate increases in the coming future does not mean that Fed is anywhere close to pivoting away from raising rates. Furthermore, he cautioned that they might raise borrowing costs next year more than they have projected. Comments from the Fed chair Powell dashed hopes that interest rate hikes will end soon. Additionally, US Federal Reserve announced to continue with its plan to shrink its $9 trillion asset portfolio, which plays an important role in firming stance of monetary policy.

Moreover, yields are rising on anticipation that Fed will continue to remain on its path of tightening monetary policy as Inflation still remains above 8% and wage growth is running at 5%. In this year, one policy meet is pending, we may see 50 bps rate hike in the December meeting. CME fed tool watch indicates 61.5% probability of 50 bps rate hike in the December meeting. Additionally, other major central banks across the globe are likely to lag behind in tightening monetary policy as policymakers are facing dilemma with inflation hitting record high and economic growth weakening. As long as Dollar Index sustains above 109 levels it may continue to rally till 114 levels.

USD vs INR, as long as it sustains above 81.80, it is likely to depreciate till 84.00 in the coming month amid strong dollar, persistent FII outflow, surge in crude oil prices and concern over widening of the trade deficit. FII’s have turned net sellers. In October there has been outflow of INR 3,080 crores into the Indian markets. Further, rupee may slip on worries over slowdown in global economic growth. However, possible RBI intervention in forex market to curb volatility may prevent sharp rupee depreciation.

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