Vijay Kumar Gaba

In the pre-finfluencer era, we used to have gods in the financial markets. Those gods would make an occasional public appearance and talk about their views on markets and investment strategies. The market participant would listen to these gods with rapt attention and follow them religiously. All those Buffets, Mungers, Rogers, Finks, Woods, Jhunjhunwalas, Damanis, et. al. were revered names. Then TikTok, Instagram, and X (formerly Twitter) happened. Financial experts, economists, monetary theorists, and technical gurus mushroomed at the rate of 100 per hour.

Everyone who has traded stocks or crypto for three months is now an expert. They not only try to influence other investors/traders by giving unsolicited advice and recommendations; but also get influenced by the advice/recommendations of others who may not be any better than them. Sometimes it appears that there are more experts in the market than the actual number of investors and traders. Unfortunately, this is the situation worldwide.

Misallocation of capital and unwarranted and avoidable losses are some natural consequences of this phenomenon. However, a more significant consequence is a diminution of traditional correlations.

A multitude of market influencers is driven by individual positioning as against a conceptual understanding of finance and economics. There are no dominating views in the markets. Each influencer is influencing multiple traders and also getting influenced by multiple other influencers. Since more positions are driven by intuitions rather than fundamentals, the divergence between market prices and fair values is wider, and lasting much longer.

For example, consider the following:

Gold and bonds are trading in opposite directions. Gold, traditionally considered a hedge against a drop in real rates, started firming up in 2022. However, now that 2024 rate cuts are getting dropped from foreca500sts, gold has given its best 2-month performance in decades.

This divergence of gold from real rates, against the historical trend, is being explained from a variety of angles. Some believe that a US sovereign downgrade may be imminent. Others explain this as a move away from USD in a worsening geopolitical scenario. However, the equity positioning and tech valuations do not corroborate any of these views.

Similarly, equities and rate expectations are also diverging against the historical trend. In the past six months, S&P500 has rallied 25% despite hopes of 2024 rate cuts fading fast.

Recently, Jamie Dimon, CEO of JPMorgan, was quoted as saying, “We are prepared for a very broad range of interest rates, from 2% to 8% or even more”. Larry Summers, Former Treasury Secretary, a very reputable name in financial markets also said, “You have to take seriously the possibility that the next rate move will be upwards rather than downwards”. Michelle Bowman, FED Governor, also said, “I continue to see the risk that at a future meeting, we may need to increase the policy rate further should progress on inflation stall or even reverse."

But no one appears to be listening to these experts. Professional TikTokers are getting more attention than them. I will not be surprised if the people who trade on their advice learn some basic investing lessons paying a heavy price.

 The issue of high and rising US public debt is a subject matter of public discussion in Indian streets. Using a common Dalal Street phrase I can say that every paanwalla, taxi driver, and barber is now discussing how unsustainable US public debt is. For example, listen to this boy .

From top economists, analysts, and global strategists to a common man on the street, all are worried about an imminent US default and its impact on the global financial system, especially the developing and underdeveloped countries.

Currently, the US public debt is close to US$35trn (Appx 125% of annual GDP) and is projected to double in the next eight years. The current US government's annual interest payments are more than US$1trn (Appx 20% of annual federal revenue; 14% of annual federal spending and 4% of GDP). The average interest rate on the entire debt is less than 3% p.a.

As of June 2023, 43% of this debt was owned by the Federal Reserve System and State and Local Governments. 32% of the debt was owned by various domestic institutions (MF, Insurance, Pension, and Depositories, etc.) The balance 26% was owned by other institutions including foreign governments. Almost the entire debt is denominated in USD.

This debt level is a matter of concern but does not prima facie appear to be at a disaster level. The worrisome part is that about one-third of US public debt is short-term (12 months or less maturity). However, considering that a large part of this debt could be owned by the government institution and the Federal Reserve System, refinancing of this debt should not pose a significant problem. In my view, US debt could be sustained with 3-4% inflation, 20% USD devaluation, 5% revenue growth (higher taxes), and rationalization/reimbursement of various war funding expenses, this debt could be sustained, reduced, and serviced. It is of course going to be hard for US savers and middle classes for a decade or so. USD losing its reserve currency status may be collateral damage.

For context, as per the interim budget for FY25, India’s central government debt was ~Rs172trn as of 31^st March 2024. This is approximately 58% of GDP. 3% of this debt is held by foreign entities. However, using the standard IMF definition India’s Debt to GDP ratio is ~82%. Since most of this debt is INR-denominated and RBI is holding a strong US$650bn forex chest, servicing is not an issue.

However, as per FY24BE, interest expense would account for 25% of total government expenditure, after material cuts in subsidies. For a developing economy, this interest expense to government revenue expenditure is considered worrisome, as it hampers investments, keeps fiscal deficit high, makes interest rate cuts difficult, leads to lower social expenditure affecting the quality of life, and hampers further market borrowing capability of the government.

The small point is that investors in Indian securities should be more concerned about seemingly unsustainable public debt in India rather than the high debt levels of developed countries.

As a small investor with zero risk appetite, I keep a cushion for lower subsidies, late payments of government dues, higher effective taxes, small probability of higher rates in my investment strategy.

For many weeks, global markets have been behaving in a very desynchronized manner. Non-congruence is conspicuous even in the behavior of the same investor/trader operating in different market segments, e.g., equities, bonds, commodities, currencies, cryptocurrencies, etc.

For example, until a month ago an investor with a balanced 50:50 debt-equity asset allocation invested in bonds as if a soft landing was imminent leading to a series of policy rate cuts over the 12-15 months. The same investor invested in equities believing that earnings growth would surpass the estimates and stocks of top technology companies would continue with their dream run. The investor was content investing in USD assets assuming green greenback would strengthen and at the same time he was buying bitcoins expecting the demise of the extant monetary system by independent crypto or digital currencies.

Last week in the US, equities reached their all-time high levels as if all is well in political, geopolitical, climate, economic, and financial spheres. It felt that the Fed was about to begin a sharp rate cycle, earnings growth had rebounded, Sino-US relations had normalized, the Gaza ceasefire had been announced, and El Nino had ended. However, across the street, the bond market was selling off as if prices were going out of control forcing the Fed to push the rate cuts to 2025. Back street, the bullion market announced that a recession was imminent. Across the Ocean, crude prices were rising as if a war was imminent with Iran threatening to escalate. In dark streets, crypto traders were laughing at conventional investors/traders rushing to bullion markets to hedge against recessionary weakness in USD.

Back home, last week equity indices reached their all-time high. Nifty Small Cap 100 gained over 7%. Commodity stocks rallied as if a bullish commodities cycle was imminent. Ignoring RBI's concerns over prices and credit, bond prices corrected only marginally. No one bothered to care about political manifestoes which are promising fiscal profligacy of gigantic proportion. USDINR appreciated marginally ruling out any pressure on the current account and balance of payment due to the sharp spike in energy & gold prices (two major imports of India) and FPI flow reversal due to the narrowing yield differential between India and developed market yields. People are also rushing to buy Silver (up 10% last week) to make some quick gains.

One of the largest asset management companies is running equities weight close to the lowest permissible in their balanced fund. It has also restricted flows to their smallcap fund. The top fund manager at this AMC is one of the most respectable names in the industry. Considering that the Smallcap index was up 7% last week against the 0.8% rise in Nifty, it seems, no one is listening to his sane advice.

We have all heard the story of an elephant and six blind men. It goes like this.

Once upon a time, there lived six blind men in a village. One day the villagers told them, "Hey, there is an elephant in the village today."

They had no idea what an elephant is. They decided, "Even though we would not be able to see it, let us go and feel it anyway." All of them went where the elephant was. Every one of them touched the elephant.

"Hey, the elephant is a pillar," said the first man who touched his leg.

"Oh, no! it is like a rope," said the second man who touched the tail.

"Oh, no! it is like a thick branch of a tree," said the third man who touched the trunk of the elephant.

"It is like a big hand fan" said the fourth man who touched the ear of the elephant.

"It is like a huge wall," said the fifth man who touched the belly of the elephant.

"It is like a solid pipe," Said the sixth man who touched the elephant's tusk.

They began to argue about the elephant and every one of them insisted that he was right. A wise man was passing by and he saw this. He stopped and asked them, "What is the matter?" They said, "We cannot agree on what the elephant is like." Each one of them told what he thought the elephant was like. The wise man calmly explained to them, "All of you are right. The reason every one of you is telling it differently is because each one of you touched a different part of the elephant. So, the elephant has all those features that you all said."

"Oh!" everyone said. There was no more fight. They felt happy that they were all right.

The story's moral is that there may be some truth to what someone says. Sometimes we can see that truth and sometimes not because they may have different perspectives which we may not agree to.

But I am witnessing a different phenomenon. No six blindfolded men are feeling different parts of an elephant this time. It is only one person who sees different parts of an elephant with open eyes and is not able to tell that it is an elephant.

In my view, the stock market outlook in India, in the short term of one year, is a function of the following seven factors:

In the past few days, three noteworthy events took place in the global financial markets. These events highlight the policymakers’ dilemma and the uncertainty faced by the financial markets.

First, the Bank of Japan changed its policy stance of “negative interest rates” ending its massive decade-long monetary stimulus exercise to a virtual close. Addressing the press after the policy decision, Governor Kazua Ueda emphasized that BoJ has “reverted to a normal monetary policy targeting short-term interest rates as with other central banks” He also added that “if trend inflation heightens a bit more, that may lead to an increase in short-term rates”.

An overwhelming market consensus now believes that BoJ will hike the policy rates from the present 0-0.1% to 1% in the next year. However, given the massive debt accumulated over the past two decades, Japan may not afford any rate hike beyond 1%.

USDJPY (151.38) is now at its lowest level since 1990.

Second, the Swiss National Bank (SNB) cut its policy rates by 25bps, its first rate cut in nine years. The other European central banks, viz., Norwegian Central Bank (Norges Bank) and Bank of England however decided to maintain the status quo. The decision of SNB was unexpected as the market consensus favored a status quo. SNB did not commit to any further cuts.

This ‘surprise’ move by SNB led the Swiss Franc (USDCHF) and Swiss treasuries to tumble down to their lowest level in eight months.

Third, the US Federal Reserve maintained the status quo on its policy rates, holding the policy rates in a range of 5.25%-5.5%, as expected by the market consensus. The market expectations are now veering around 0-3 cuts this year, against the expectations of 6-8 cuts four months ago. The ‘no-cut’ this year is gaining more support every day.

In the post-meeting press interaction, Fed Chairman Jerome Powell was as non-committal as one could be, leaving the markets confused and speculating. Powell said, “despite high interest rates, economic growth has remained relatively strong and inflation has materially lowered over the past year. Consequently, the FOMC raised its growth and inflation expectations for 2024”. Powell added that “there is still plenty of progress to be made on meeting its 2% inflation target” and hence “the path forward is uncertain.”

After reading the three policy statements carefully, my understanding of the situation is as follows:

·         The central banks are increasingly confident of avoiding any deeper recession in the short term at least (1-2 years). Even the “soft-landing” (shallow recession) appears to be slowly becoming a bear case. The base case is low growth for a longer period.

·         The central bankers are inclined to accept 2-4% inflation as normal. This suits everyone. The governments that have accumulated massive debt over the past decade would be happy if the real rates just stayed negative for long. Savers are happy to earn higher nominal rates on their savings. Corporations are happy to borrow more at negative real rates, buy back their equity, and enhance the market value of their businesses with low earnings growth. We may also see a relative currency depreciation of countries with high external debt (e.g., the US) as a tool for debt management.

·         The popular narrative revolves around “resilient growth”, “sticky inflation” and “calibrated easing”. None seems to be positioned for a Fed rate hike presently. Though the probability may be negligible presently, further strengthening of growth momentum, a strong El Nino, and/or worsening of geopolitical conditions in the Middle East Asia and Central Europe fueling inflation could enhance this probability.

In the Indian context, the RBI has been on pause for over a year now. This is despite inflation consistently remaining close to above the upper bound of its tolerance range of 4-6%; growth surpassing its mostly optimistic estimates; distinct signs of heating in certain pockets of the credit market (especially credit card outstandings and unsecured NBFC lending); and the regulators frequently expressing concerns over excesses in financial markets. RBI has chosen to use tools like withdrawing liquidity through open market operations and nudging NBFCs and banks through advisories to regulate the credit markets.

The popular market narrative in India also revolves around the timing of the cut rather than “cut or hike”. For the financial sector, it means “Margin pressure”, “slower growth”, and “pressure on asset quality”.

RBI’s pause hinders the lenders’ ability to hike the lending rates when the cost of funds is rising due to tighter liquidity and stricter norms. The government has hiked the rates on small savings and EPF. This pressures banks’ cost of deposits. Stricter lending norms might adversely impact the product mix of lenders as the weightage of high-margin personal and unsecured loans reduces. Pressure on low-cost CASA rises as the savers move to high-yield options like corporate bonds, credit funds, and even equities.

In my view, investors should be wary of the free advice of deep value in the banking sector. The large banks are underperforming for a valid reason and smaller banks may have completed their re-rating journey.

 Sitharaman, Powell toss the ball in Das’s court

Wednesday night, the Federal Open Market Committee (FOMC) decided to maintain the status quo on policy rates for the fourth successive review. The Committee reiterated that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward two percent.” The Committee however made it quite clear that any rate hike from the present level is no longer on the table.

In the post-meeting press meeting, Fed Chairman Jerome Powell indicated that FOMC may not consider rate cuts in its next meeting in March 2024. The market is thus expecting a rate cut in May 2024.

In another development, the Union Finance Minister, Ms. Nirmala Sitharaman, presented an interim budget for the fiscal year 2024-25. Two notable features of the interim budget were (i) Nominal GDP growth projection for FY25 at 10.5%, implying a well-controlled inflation environment; and (ii) Fiscal deficit of 5.1% of GDP for FY25BE, implying a strong commitment to fiscal discipline.

In line with the lower fiscal deficit projection, the borrowing program of the government has also been moderated. The finance minister has proposed Rs11.75trn of net borrowing from the market by way of fresh government securities in FY25BE against Rs11.80 borrowed in FY24RE. This shall leave decent scope for private investment.

In her speech, the finance minister also emphasized the supportive environment her government is building for acceleration in private capex to achieve the high growth targets. The minister has provided higher allocation for production-linked incentives (PLI).

With the global rate and monetary policy environment set to become benign in 2H2024; domestic macro (fiscal deficit, inflation, external conditions, etc.) improving and the government holding its side of promise to maintain fiscal discipline despite forthcoming general elections, the ball is now in the court of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) to provide impetus to the economic growth.

The risks to inflation now mostly stem from food (inclement weather) and energy (geopolitical disruptions) which may not have a significant correlation with the policy rates. It would therefore be in order for RBI to guide a lower rate path and increase system liquidity.

The MPC meeting next week therefore will be watched with keen interest. I would not expect any immediate rate cut (though it will be welcome if happens), a clear guidance for lower rates going forward and enhanced system liquidity is what I do expect from MPC. If RBI delivers on these expectations, markets could rally to new highs led by financials and rate-sensitive sectors like auto and real estate.

The first day of January of the Gregorian calendar is widely celebrated as “New Year” globally. Scientifically speaking, this is just another point in ad infinitum; and no different from the millions of other similar points in the history of mankind. Nonetheless, we celebrate it as a new beginning, after every twelve Gregorian calendar months. The idea perhaps is to take a break from the routine and reflect on events of the past twelve months to review, reassess, revise, retreat a bit if required, and resume. It is common for people to take a pledge on this occasion, to take corrective measures for improving their lifestyles and behavior, and to set new goals for themselves.

As widely expected, the Federal Open Market Committee (FOMC) of the US Federal Reserve, unanimously decided to keep the key fund rates at 5.00% - 5.25% for the second consecutive time. The FOMC had last increased the rates in July 2023.

The Committee noted, "Economic activity expanded at a strong pace in the third quarter". It also acknowledged “the tighter financial conditions faced by businesses and households”. Upgrading its outlook for the US economy, Fed Chairman Jerome Powell remarked, “The process of getting inflation sustainably down to 2% has a long way to go”.

After the last meeting in September 2023, the monetary policy statement issued by the FOMC had noted that “credit conditions have tightened” consequent to the eleven consecutive hikes delivered by the Fed. This time, the Committee added “financial” to the credit conditions, noting the rising stress in the financial system as a consequence of rising bond yields.

Caught between the resilient economy and building stress in the financial system, the Federal Reserve seems to have decided to stay on the fringe and let the markets find their equilibrium.

Though, the post-meeting FOMC statement reads, “committee is still determining the extent of additional policy firming” and “The Committee will continue to assess additional information and its implications for monetary policy,” the consensus in the market is leaning towards “a long pause” followed by a series of cuts; assuming the Fed is done with hiking and it will now wait for the market forces to find an equilibrium on prices and growth.

Whitney Watson, co-CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management, reportedly commented it’s likely the Fed will keep its policy unchanged into next year. “There are risks in both directions,” Watson said. “The rise in inflation expectations, owing to higher gas prices, combined with strong economic activity, preserves the prospect of another rate hike. Conversely, a more pronounced economic slowdown caused by the growing impact of higher interest rates might accelerate the timeline for transitioning to rate cuts.”

Post the release of the FOMC statement, the yield on the two-year Treasury, which is more sensitive to Fed policy, fell 12.5 basis points to 4.93%, the lowest level since September 2023. Stocks also rallied with S&P500 and NASDAQ ending the day with over one percent gains.

 One of the major trends in the post global financial crisis (GFC) world is the weakening of the United States of America’s (USA) clout as an undisputed global economic and strategic leader. In the past 15 years, the US administration has consistently failed in achieving its economic, financial, technological, and strategic objectives.

The economic performance of the US has been below par in the past decade. The handling of the pandemic has been highly questionable. Both monetary and fiscal policies have not yielded the stated objectives of price stability (inflation has been persistently high and rates have become growth restrictive) and financial stability (many regional banks have failed, delinquencies are rising and capital adequacy & reserves of banks have deteriorated, particularly in the past couple of years). Fiscal profligacy has benefited the rich much more than the poor.

The efforts to restrict the benefits of advanced technological innovations flowing to China through tariff and non-tariff means have mostly failed. In fact, these efforts have led to a greater focus on China to successfully develop indigenous technology, forge new alliances, and diversify its market and vendors. The Sino-Arab technoscientific alliance is one prominent example.

The exit of the US forces from Afghanistan and the installation of the Taliban government; failure to prevent Russian invasion in Ukraine and protracted (21st months) conflict there; continued ISIS aggression in Syria and alienation of Turkey; virtual failure to reign Iran’s nuclear ambitions; and now escalation of hostilities between Israel and Palestine are only some recent examples of the strategic failures of the US.

To make things worse, the demography of the US started to worsen. In 2022, the US population grew a meager 0.4% and is estimated to shrink in 2023. Whereas the number of homeless and jobless may be rising.

Consistent deterioration in the quality of political leadership; sharp rise in income and wealth inequalities leading to a conspicuous rise in domestic unrest and violence; unmindful fiscal profligacy; the emergence of an alliance of nations having quasi, pseudo, and non-democratic regimes led by key adversaries China, Russia & Iran and including key allies like Saudi Arabia is seriously undermining the US supremacy.

The education and skill standards of the average US youth are deteriorating fast, raising the reliance on immigrant workers for jobs requiring high skills. The political rhetoric, even from the likes of Vivek Ramaswamy who himself comes from a family of immigrants, further explains the goal incongruence in the US policy.

In my view, it might be a matter of years, not decades, when the fabled “US Consumer” diminishes. The average American household becomes spendthrift; the social security system collapses and fiscal profligacy is forced to reverse the course. An entire global ecosystem that is based mostly on the indulgent US consumer could potentially come down crashing. Also, while most money managers and businesses in India are talking about the “China+1” opportunity, I have not heard anyone talking about “China is number 1” in new technologies including 7G, 8G, AI, smart chips etc.

As an investor, I would like to build these probabilities into my strategy. I am keen to filter my investments for the US consumer and technology dependence.

Continuing from yesterday (see here).

I am convinced that the current global monetary and fiscal conditions will have an enduring impact on the global financial system, trade, businesses, and markets. We may feel comfortable with the resilient performance of the Indian economy and markets in the past couple of years, but it would not harm if we factor in the global conditions and trends in our investment strategy. In particular, household investors with relatively smaller portfolios need to exercise due precautions to protect their portfolios from a negative shock.

I have negligible knowledge of global economics, financial systems, and markets. I therefore usually approach these larger issues with common sense and my elementary understanding of the basic concepts of economics. History, of course, always provides some useful support.

I usually study the historical behavior of economies and markets to anticipate the likely actions and reactions of the current set of market participants and policymakers. It is my strong belief that the reaction of investors and fund managers in their 30s or early 40s, who have never experienced borrowing costs in high single or double-digit; policymakers who have not governed through prolonged periods of war, human misery, uncertainty, lack of information, and are not particularly committed to ethics, ideologies, and standards seen during crisis during would react the same way as their predecessors acted/reacted during 1920-1940; 1950-1960, 1970-1980, and even 1990s.

I may be wrong here, but I believe that the policymakers today are governed by the principle of SoS (Save our Souls first). Their natural tendency is to protract the inevitable decision (kick the can) as long as possible rather than make hard decisions that provide sustainable solutions. Similarly, the market participants are also influenced by their inexperience. To me, this implies that the global policymakers and market participants are not adequately prepared to face a material event (credit, geopolitical, natural); and may panic easily and excessively if such an event were to occur. We have seen glimpses of such panic during the outbreak of the Covid-19 pandemic in the year 2020.

Considering that the present global economic, financial, and geopolitical conditions are much more fragile as compared to the summer of 2020, the contagion will spread much faster, wider, and deeper. Therefore, hiding under the shelter of the assumption that India shall mostly remain immune to the impending global crisis may not be a good idea for smaller investors for the simple fact that their capital is much more precious (much higher marginal utility) as compared to the larger or institutional investors.

With this background, I may now share my views about the five points I mentioned yesterday:

1.    Whether the Fed is done with hiking: In my view, this question is not important as of now. A 25bps hike in the next meeting would not make much of a difference, as the previous hikes are still permeating through the financial system. The lending rates may continue to rise even if the Fed does not hike any further.

2.    Will the rates stay higher for longer: In my view, yes. I believe higher rates are arguably the most effective method to bring down the indebtedness of the US government. The federal bond prices have already fallen by 25-40% in the past year, from their recent highs. A 2% rise in yields would shave off another 20 to 30% in bond values. In the meantime, the Fed is creating leverage (through QT) to buy back bonds at half the face value. Large corporations with tons of cash parked in treasuries, hedge funds with leverage positions in treasuries, and the US trade partners with a surplus (China, etc.) would bear much of the losses. Pension funds etc. which hold most securities till maturity may not suffer much. Savers may enjoy higher rates offered by the fresh issuances. Since most new issuances would be at a much higher coupon rate, these may automatically enforce fiscal discipline over the next 2-3 years.

In the interim, however, we may see severe pain in the financial markets as the excesses of the past two decades are obliterated.

3.    Hard landing or soft landing: In my view, it would most likely be a growth recession – a prolonged phase of low or no real growth, as the US economy adjusts to a normalized monetary and fiscal policy mechanism and the USD is freed of onerous responsibility of being the only global reserve currency.

4.    Impact of higher rates on USD: In my view, the normalized interest rates would eventually result in a much less volatile and stronger USD.

5.    Impact of a softer US economy on the global economy: A softer US economy now would be bad news for the global economy and therefore markets. However, over the medium term, a fiscally disciplined US economy (with higher domestic saving rates, positive current account balance, and refurbished infrastructure) could provide strong support to the global economy, especially the emerging economies, much in the same way it did in the 1950s and 1990s.

How do I build this in my investment strategy…will share as I figure it out.

The Federal Open Market Committee (FOMC) of the US Federal Reserve (the Fed) decided unanimously to keep the benchmark fund rate in the range of 5.25% - 5.5%; pausing one of the sharpest hike cycles in the past four decades. Beginning in March 2022, the Fed has hiked the benchmark rate 11 times to the highest since 2001.

The latest FOMC decision may be influenced by the recent evidence showing that the hikes already implemented are beginning to impact inflation, despite strong economic outcomes. Notwithstanding, its latest decision to pause, 12 out of 19 FOMC members felt that one more rate hike would be needed in 2023 before the current rate hike cycle ends, as inflation is still running above the Fed’s 2% target. The persistent strength in the economy requires caution as inflation might bounce back again.

In particular, FOMC members sounded cautious about the tight labor market, as wage growth has so far accounted for the bulk of price pressures in the service sector,

Higher for longer

Speaking at the post-meeting press conference, Fed Chairman Jerome Powell, cautioned that "Holding the rate doesn't mean we have reached the stance we seek”. The committee projects the median Federal Funds rate at 5.1% in 2024, higher than its June estimate of 4.6%, suggesting that rates will remain higher for longer than earlier projections.

The FOMC members now see a couple of rate cuts in 2024, against four rate cuts projected previously. For 2025, interest rates are expected to drop to 3.9%, well above the 3.4% previously projected, and fall further to 2.9% in 2026.

Economic growth forecast upgrade

Taking cognizance of the persistent strength in the economy, FOMC upgraded its economic growth forecast for 2023 to 2.1% from the previous 1% rate projected in the June 2023 meeting. The growth forecast for 2024 was also raised to 1.5% from the previous 2.1%.

Yields spike, curve inverted

Post the announcement of the FOMC decision, the US bond yields rose to cycle highs. The benchmark 10-year G-Sec yields ended at 4.395%, while the more sensitive 2yr yields were at 5.17%. The US treasury bond yield curve is now sharply inverted, indicating market expectations of much slower growth, if not full-blown recession in the offing.

Equities correct led by big Tech

The US Equities corrected over 1% from their intraday highs, post the FOMC decision. The fall was led by the growth sectors, especially the big technology companies like Alphabet (-3%), and Meta Platforms (-1%) and Apple (-1%).