Markets are pricing in 25 bps US Fed rate hike: Analysts

On its part, the US has been battling a spike in inflation that hit 7.9 per cent in February - a four-decade high. The CPI has not been the highest since January 1982, when it hit 8.4 per cent

All eyes will be on the US Federal reserve (US Fed) this week as it is most likely to lift rates at the end of its two-day meeting March 15 & 16. The development comes at a time when war clouds over Russia and Ukraine have intensified and impacted several key commodity prices, and especially that of crude oil.

Most analysts see the US Fed hiking aggressively and expect up to seven hikes in 2022, with the one later this week to be around 25 basis points (bps). Markets, analysts believe, are pricing this in at the current levels.

“A 25 bps hike by the US Fed is already priced-in by the markets. However, if the quantum of hike is more, it will be perceived as a negative. That said, there is another school of thought that the hike may be pushed back given the geopolitical developments, which the markets are not expecting at all right now. In case of a postponement (of the hike), there is a risk of inflation getting stickier and a recession setting in the US” believes U R Bhat, co-founder & director at Alphaniti Fintech.

Those at UBS, on the other hand, believe the Fed now carries lower odds of doing anything other than 25 bps in March, though it is notable that since the Ukraine operation, several Fed speakers have reiterated that a 50 bps hike should be on the table at some point.

“We expect the Fed to start hiking by 25 bps increments in March at every meeting until November (six times to reach 1.5 per cent) before then pausing and resuming next year,” wrote Arend Kapteyn, an economist at UBS in a recent co-authored note with Bhanu Baweja, their strategist.

GRAPHIC: JEFFERIES' EXPECTATIONS
 

On its part, the US has been battling a spike in inflation that hit 7.9 per cent in February – a four-decade high. The consumer price index has not been the highest since January 1982, when it hit 8.4 per cent amid a recession.

“The downward impact on economic activity would call for a more cautious approach by the Fed, especially if stock markets get a beating. While the Russian invasion of Ukraine may have reduced the probability of an outsized first hike, it may add to the need for monetary policy tightening in the second half of the year, as the projected decline in inflation will be slowed down by this new supply shock,” said Philip Marey, senior US strategist with Rabobank International.

G Chokkalingam, founder and chief investment officer at Equinomics Research, too, believes that the US central bank will not be too aggressive in hiking rates in the upcoming meeting on March 15 and 16 given the geopolitical concerns and how its own economy is progressing. A 25 bps hike in rates, he too believes, is already penciled in by the markets at the current levels.

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“In 2017 and 2018, the US Fed opted for aggressive rate hikes. If we look at the performance of US indices for the cumulative period of 2017 and 2018 when the rate hike was 175 bps, the US equity market still ended as a winner. Ultimately, a strong US and global economy matters most for markets to stay buoyant. Of course the rate hikes could bring in volatility with some downward bias, but it will not create any major fall in the Indian equity markets,” he said.

Twitter: @Pun_ditry