US Fed decision today: 5 key factors that will shape Fed’s policy decision

Recently, Powell stated that considering the recent macroeconomic indicators, it would take longer than expected for inflation to return to the Fed’s 2 per cent target.

Considering the recent macroeconomic trends in the US and current geopolitical scenarios, it is safe to say that the Fed’s fight against inflation will continue in the near future. Experts are divided in their projection about rate cuts; some still expect two rate cuts this year while some say there may be no rate cut in the calendar year 2024.

Also Read: US Fed meet: What do dimming rate cut hopes mean for Indian stock market?

Let’s take a look at five key factors that will shape the Fed’s policy decision on Wednesday:

1. Growth, inflation dynamics

The recent macroeconomic data in the US revealed a challenging scenario; inflation rose hotter than expected, and the GDP grew at the slowest pace in the last two years. The Fed is now faced with the intricate task of managing growth without risking a further spike in inflation.

2. Labour market trends

The Fed has been trying hard to cool the jobs market in its pursuit of bringing inflation down to its target of 2 per cent. However, it looks like the Fed’s fight will continue for a longer period.

Driven by the rise in wages and benefits, US labour costs increased above expectations in the first quarter.

According to a Reuters report, the US Employment Cost Index (ECI) rose 1.2 per cent in Q1 after rising by 0.9 per cent in Q4 last year. This was slightly above the 1 per cent rise forecast by economists polled by Reuters. On a year-on-year basis, labour costs rose 4.2 per cent, the same as the fourth quarter.

The latest labour market data has further punctured the hopes of rate cuts as it indicates inflation still remains high in the US.

Also Read: US Fed meet: What to expect amid sticky inflation? Top experts share their views

3. Consumer spending

Consumer spending trends remain strong in the US which is likely to give confidence to the Fed that the US economy is not staring at the risk of stagflation. 

According to a Reuters report, based on the Commerce Department’s Bureau of Economic Analysis data, the personal consumption expenditures (PCE) price index rose 0.3 per cent in March, which is in line with the unrevised gain in February.

4. Bond yield movement

The US bond yields are near the 4.6 per cent mark amid sticky inflation. Some analysts expect bond yields to breach the 5 per cent mark as the possibility of a Fed rate cut looks remote.

The 10-year US bond yield is up 80 basis points this year, nearly at the 4.7 per cent level.

Rising bond yields indicate the market is expecting higher inflation. This may significantly influence the Fed’s policy decision.

5. Geopolitical scenarios

A rise in geopolitical tension could cause supply disruption in crude oil and other commodities, raising prices and ultimately fuelling inflation.

The Fed will closely observe the evolving scenarios in West Asia and Ukraine and will not go for a premature rate cut in the near future.

Fed outcome and its impact on Indian stock market

Experts believe the Fed’s policy outcome on May 1 will not have any major impact on the Indian stock market.

However, the Fed Chair’s comments on inflation and the economy and his hints on the interest rate trajectory will influence the mood of the market.

Also Read: US Fed meeting outcome today: How will it impact the Indian stock market?

“The Fed decision is already discounted and, therefore, is unlikely to impact the market,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

“US corporate earnings are decent and, therefore, can support the market. In India, there is a huge liquidity flow into the market supported by strong fundamentals of impressive GDP growth and good corporate earnings. FII selling is being overwhelmed by aggressive DII buying, putting the FIIs on the back foot. The market will remain resilient despite high valuations,” said Vijayakumar.

“The decision is unlikely to have any meaningful impact on the markets. However, markets will closely watch out for the commentaries from the Fed governor,” said Apurva Sheth, the head of market perspectives and research at SAMCO Securities.

Shrey Jain, Founder and CEO SAS Online said the markets have already factored in the status quo on the interest rates. The bond yields have already inched up. A hawkish commentary ruling out a cut in interest rates at a time of slowing down the economy will be detrimental to the equity markets.

According to Pravesh Gour, Senior Technical Analyst, Swastika Investmart, investors will hang on every word of the Fed chairman’s speech for any dovish hints. A perceived shift towards a more accommodative monetary policy could trigger a positive market response, he said.

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 01 May 2024, 02:42 PM IST