Fed keeps rates unchanged in a relief to stock markets

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Stock markets heaved a sigh of relief after the US Federal Reserve indicated a continuation of its easy money policy and monthly bond purchases. The Fed’s monetary policy panel decided to keep interest rates in a range between zero and 0.25% at its latest meeting.

Even though daily new coronavirus cases have roughly quadrupled since its 15-16 June policy meeting, the US central bank did not sound unduly worried. The Federal Reserve will likely reduce its monthly purchases of mortgage-backed securities and Treasuries simultaneously when it is time to pare back its support for the US economy, Fed chair Jerome Powell said on Wednesday.

“We see this meeting opening the door to a possible taper announcement in December that begins reducing the purchase pace in January-March,” said Madhavi Arora, lead economist at Emkay Global Financial Services.

“We don’t think Jackson Hole (meeting) will be used to communicate anything important about tapering. Despite no surprises, the 10-year US treasury slid further to 1.23%, possibly hinting at stagflation risks or correcting the Fed’s supposed mistake of being active on the idea of tapering. We maintain that treasuries appear dislocated from fundamentals,” she said.

According to Arora, catalysts such as labour market tightening, higher bond supply or a renewed push for the bipartisan infrastructure package may be needed to push yields higher.

Indian markets snapped a three-day losing streak on Thursday as the Fed reassurance about interest rates tapering being some time away boosted investor sentiment. The BSE Sensex climbed 209.36 points or 0.40% at 52,653.07. The Nifty ended up 69.05 points or 0.44%, closing at 15,778.45.

Markets in other Asia-Pacific regions closed higher as well. Hong Kong’s Hang Seng Index rose 3.3%, China’s Shanghai Composite Index 1.49% and Japan’s Nikkei 225 0.73%.

Despite weak trends in markets, Indian equities have remained the top performer among emerging markets this month. In July, the benchmark Nifty gained 0.4% in dollar terms, while MSCI Emerging Markets Index was down nearly 8%, and MSCI World jumped about 2%.

Vinod Nair, head of research at Geojit Financial Services, said, “Global markets were on track to rebound after the panic sell-off surrounding Fed policy and Chinese tech crackdown cooled off. Despite the hawkish commentary from Fed, it did not signal a rush to taper the stimulus measure. China’s attempt to calm investors’ nerves also helped the market to take a breather. Meanwhile, metal stocks were sparked by the huge infrastructure fiscal package finalized in the US, in anticipation of high demand.”

Investors worldwide have been keenly watching the Fed policy for indications of stimulus tapering. Although the Fed did signal that it is evaluating adjusting its asset purchases, it did not indicate any timelines for the same. Foreign institutional investors (FIIs) have already sold Indian shares worth $1.37 billion so far in July, after pumping in $2.25 billion in the previous two months. This is the first sell-off by FIIs in three months.

“Although the scaling-back of asset purchases by the Fed would have implications on the flow of funds into Indian markets, given that the timeline and scale of the same have not been specified, it is unlikely to have any significant impact in the near future. In terms of monetary policy action, RBI’s monetary policy would continue to be driven by domestic considerations of economic growth. Towards this end, it would continue to maintain its accommodative monetary policy despite price pressures,” said Care Ratings.

Reuters contributed to the story.

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