How analysts are interpreting the US Fed's decision

The US Federal Reserve (US Fed) hiked interest rates by 25 basis points (bps), ending a near-zero interest rate regime that lasted nearly a decade. 

Most global markets gained ground post the announcement, with Hang Seng, Taiwan Weighted, Shanghai Composite, Straits Times, S&P BSE Sensex and the Nifty 50 indices moving up 0.5% - 1.8% in intra-day deals.

Also Read: Emerging market sell-off unlikely in case of Fed hike: analysts

Here's how top global research houses and analysts have interpreted the US Fed's statement:

Philip Marey, senior US strategist, Rabobank International

We think that the downside risks to the Fed’s rate projections are larger than the upside risks. Therefore, we do not expect the Fed to make the four rate hikes in 2016. We think that they will hike only twice next year. This also implies that we expect further downward shifts in the median values of the dot plot, probably as soon as March. There are several downside risks to the pace of the economic recovery.



Lewis Alexander, Nomura

 

Our expectations for policy were little changed. On the one hand, the FOMC showed, largely in its forecasts, more inclination to proceed with rate hikes next year than we expected. However, they stress that their decision will be driven by how the economy evolves, and they seem more optimistic about prospects for growth than recent data warrant. We see a second rate hike coming in June as somewhat more likely than a second hike in March. However, that decision will depend how much momentum the economy carries into next year, and whether or not signs that inflation really is picking up emerge in the first quarter.

Ethan S. Harris, global economist, Bank of America - Merrill Lynch

Looking ahead, we continue to see the Fed hiking three or perhaps four times next year. Our base case of three hikes assumes that there is a soft spot in the markets or the economy at some point in the year ahead, causing the Fed to pause for more than one meeting. On the other hand, if the economy consistently matches the Fed’s forecasts we would expect four hikes. Looking further out, we continue to expect four hikes in 2017, a peak of about 3.25% in the funds rate and a very slow winding down of the Fed’s balance sheet starting in early 2017.

Andrew Colquhoun, head of Asia-Pacific sovereigns, Fitch Ratings

The rate rise was well-signalled and in line with Fitch’s expectation. The real uncertainty remains how quickly rates rise, and to what peak. There is still a significant wedge between where the Fed is telling us it sees rates going and what the market is pricing in. An out-turn closer to Fed guidance would be a substantial shock for a region where private sector debt levels have risen rapidly and where capital flows have already started to reverse. This uncertainty puts a premium on credible and coherent policy responses by authorities in buffering sovereign credit profiles.

Suvodeep Rakshit, economist, Kotak Institutional Equities

Even as the Fed’s median projections of funds rate reflect around 100bps rate hike in CY16, we believe it will need time to assess the effect of the first hike. We expect two-three more rate hikes in CY16—possibly next in March 2016. Steady dollar strengthening over the next few quarters will keep the INR on a depreciating bias against the US dollar. However, the fundamentals have improved significantly since 2013. The INR is unlikely to see any sharp or heavy depreciation and will likely remain in a range of 66-69 over the next year. Overall, we expect moderate negative impact on Indian equities and debt from a gradual increase in US interest rates over the next 12-24 months.

Murthy Nagarajan, Head – Fixed Income, Quantum AMC

Emerging markets are expected to do well as the US Federal Reserve would maintain its accommodative stance. Commodity prices are expected to be weak and this should favour countries like India, which is a net importer of commodities. The softness in commodity prices would allow the Reserve Bank of India (RBI) to cut rates by 50 basis points in the next financial year.

Sahil Kapoor, chief market strategist, Edelweiss Financial Services

We expect most markets to remain stable as the policy outcome is on expected lines. Most stock indices in the world may recoup part of December’15 losses. Nifty lows of 7,500 to 7,550 have been an area of strong support. Until it continues to hold these levels, we expect the markets to gradually move towards 7,950 to 8,000 range. Indian 10-year bonds yields may see some respite as outflows from Foreign investors post the Fed rate hike may taper off.

Dhananjay Sinha, Head- Institutional Research, Economist & Strategist, Emkay Global 

We read the tone and tenor of the FOMC statement as neutral even through, as expected there is clear commitment towards sustaining an accommodative stance for sometime. The liftoff reflects a big change in monetary policy perspective as the Fed abandons its earlier over-cautious stance. Fed’s exit can be a significant risk for EM flows, particularly portfolio flows, given the backdrop of the sharp deceleration in EM’s GDP and earnings growths. We maintain that Fed normalisation process will gain momentum over the course of 2016. The 25 bps hike yesterday will be followed by 75 bps (or may be 100bps) hike over the course of 2016.