Are markets in for a wild ride after US Fed meet outcome?

Inflation rate in the US hit its fastest pace in nearly four decades last year at 7% as pandemic-related supply and demand imbalances, along with stimulus intended to shore up the economy pushed prices higher.
This accelerating inflation, analysts believe, could cause the US Federal Reserve to get even more aggressive than economists expect in the way it raises interest rates this year.

Credit Suisse says, "We are a bit concerned about the inflation rate that is running very high in the US, which could prompt the US Fed to increase interest rates much faster in the future. Nevertheless, the market has already priced in faster tapering and one rate hike by March 2022."

In this backdrop, global equity markets have remained on the edge ahead of the US central bank's two-day meeting that started Tuesday.
While they expect no action regarding interest rates just yet, they feel the Committee will look to hike rates in March 2022. If that happens, it will be the first increase in the central bank’s benchmark rate since December 2018.

Those at Rabobank International, too, agree and expect the US Fed to start hiking rates as we head deeper into 2022 with the first rate hike in March 2022.

"Recent testimony, speeches and interviews have made it clear that the FOMC is gung ho and ready to start hiking in March. Unless we see a setback in the real economy, we expect the Fed to hike each quarter this year," says Philip Marey, Senior US Strategist, Rabobank International. 

And even as the markets have discounted the possible hike in rates by the US central bank, experts say the volatility is here to stay and investors should remain cautious.

"Excessive volatility is likely to continue for a few more days until clarity emerges out of the crucial Fed meet. The market is discounting a hawkish Fed. If the US central bank does sound very hawkish and indicates four rate hikes in 2022, the market will again turn weak," says VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

That said, the Indian markets, which saw a stellar run for most part of 2021, have underperformed in the past few months.
The benchmark Nifty50 has declined 7% from its October high of 18,339, as against around 4% decline each in the United States’ Dow Jones Industrial Average and MSCI Emerging Markets Index.
The MSCI World Index, meanwhile, has declined around 5 per cent. China’s Shanghai Composite Index, seems to have 

Will this underperformance continue? Let's go to Deepak Jasani, head of retail research at HDFC Securities for his views on the road ahead for the markets in the short-term.

The markets will remain closed on Wednesday on account of Republic Day and will react to the outcome of the US Fed meeting when it resumes business on Thursday, January 27.
 

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