In an attempt to fight inflation, central banks in the majority of developed economies have been raising interest rates this week. The benchmark interest rate was raised by 25 basis points by the US Federal Reserve on February 1st. Interest rates were raised by 50 basis points by the Bank of England on February 2 to a multi-year high of 4%. The European Central Bank increased interest rates by 50 basis points on Thursday as well. The commentary that accompanied the policy pronouncements, however, implies that the cycle of tightening monetary policy may be reaching its peak globally, given the evidence that points to a softening of prices.

The Federal Open Market Committee raised the federal funds rate by 0.25 percentage points in line with market forecasts. That brings it to the highest goal range since October 2007 of 4.5%–4.75%.

In a process that started in March 2022, the decision represented the eighth step. The fund rate alone determines what banks charge one another for overnight borrowing, but it also has an impact on a variety of consumer lending products.

Despite recent signs of slowdown, inflation is still running close to its highest level since the early 1980s, and the Fed is targeting hikes to lower it.

Inflation “has moderated considerably but remains elevated,” according to the post-meeting statement, which is a change from the prior phrase.

In his post-meeting news conference, Fed Chairman Jerome Powell stated that the inflation figures gathered over the previous three months “suggest a welcome slowdown in the monthly pace of rises.” “While recent developments are promising, we will need a lot more proof to be sure that inflation is on a sustained lower path,” the statement continued.

But the markets were watching this week’s meeting for clues that the Fed would soon stop raising interest rates. But no such cues were in the statement. Following the announcement, equities initially declined, with the Dow Jones Industrial Average dropping more than 300 points.

Fed interest rate hike Powell’s press conference saw the market recover, though, as he conceded that “the disinflationary process” had begun. Major averages eventually started to rise as market chatter concentrated on Powell’s largely upbeat remarks on the fight against inflation.

Fed interest rate hike Powell stated that the disinflationary process has reportedly begun for the first time but cautioned that it would be “extremely premature to declare triumph or to assume we truly got this.”

The FOMC continues to perceive the need for “ongoing increases in the target range,” according to the Fed’s statement. Market participants had hoped for the term to be softened in some way, but the unanimously adopted statement retained it in place.

When stating what will influence the future course of policy, the statement changed one part.

Fed interest rate hike the “extent” of future Fed interest rate hike, according to officials, will be decided depending on a number of variables, including the consequences of the rate hikes thus far, the lags before which policy takes effect, and changes in financial and economic conditions. In a previous statement, it was stated that the committee would consider those variables to decide the “pace” of future hikes, perhaps indicating that the committee sees an end to the increases eventually or at least that lower increases will continue.

Fed interest rate hike Before switching to a modest 0.5 percentage point hike in December of 2022, the Fed approved four straight 0.75 percentage point increases. Several officials recently expressed their opinions in the public that they believe the central bank can at least reduce the amount of the hikes without announcing when they could end.

The committee described economic growth as “moderate” while it was hiking its benchmark rate, noting merely that unemployment “has remained low.” The phrase “strong” employment gains were left out of the most recent labor market review.

The statement otherwise remained unchanged from earlier messages, as the Fed is working to stop inflation.

Rupee has its worst day in over four months due to concerns over Fed interest rate hike-

An encouraging U.S. jobs report stoked concerns about future Federal Reserve rate hikes, causing the Indian rupee to drop against the dollar on Monday, recording its worst daily loss in more than four months. This led experts to reevaluate the possibility of further rate cuts this year.

The rupee dropped by roughly 1% to 82.7250 against the dollar, the most since September 22.

After the U.S. economy added more than 500,000 jobs last month, exceeding estimates and boosting wagers that the Fed would retain a hawkish attitude, the rupee and other Asian currencies struggled to find buyers.

In a commentary, Societe Generale stated that “the data on Friday undermined the market narrative for rate cuts later this year, on which the January frenzy for risk assets largely rested.”

Expectedly, both the dollar index and Treasury yields rose on Friday. On Monday, the dollar index increased a little bit more as Asian currencies saw losses led by the Thai baht. The worst day for the Thai baht in more than 20 years occurred.

Fed interest rate hike, according to a note from Nomura, the strong U.S. labor market points to a postponed Fed funds rate cut.

Nomura continued, “We no longer expect cuts in 2023, but we maintain our prediction of one more Fed Funds rate hike in March to a terminal range of 4.75-5.0%.

The emphasis now is on the reactions of Fed officials. On Tuesday, Chair Jerome Powell will give a speech at the Economic Club of Washington, D.C.

SocGen predicted that Chair Powell, who would speak tomorrow, would reiterate the need for repeated interest rate increases.

In line with the increase in Treasury yields, the rupee forward premium fell, with the 1-year yield falling by around 12 basis points.

RBI is likely to accept a 25 basis point repo rate increase, according to experts-

Fed interest rate hike, The Reserve Bank is likely to opt for a modest 25 basis point repo rate increase in its upcoming bi-monthly monetary policy announcement scheduled later this week as a result of retail inflation showing signs of slowing down and the US Fed decreasing the pace of increase in its benchmark interest rate. The central bank increased the important benchmark interest rate (repo) by 35 basis points (bps) in its review of the country’s monetary policy in December after providing three consecutive rises of 50 bps.

The Reserve Bank has raised the short-term lending rate by 225 basis points since May of last year in an effort to rein in inflation, which is primarily the result of external causes, particularly the disruption of the global supply chain caused by the outbreak of the Russia-Ukraine war.

The Monetary Policy Committee (MPC), the rate-setting body of the RBI, will begin its three-day deliberations on the upcoming round of monetary policy on Monday. On February 8th, the decision will be made public.

Despite the fact that inflation is still significantly higher than any central bank’s target, Kotak Institutional Equities stated in a research report that the global inflation environment is progressively becoming benign. In the coming months, inflation will probably continue to decline, ending the cycle of rate hikes by the first half of 2023 and possibly resulting in a rate reduction in late 2023 or early 2024.

“However, given the significant global uncertainties, the central banks’ tools for promoting growth through monetary easing remain constrained, running the risk of longer-term higher rates.”

As it evaluates the delayed effects of monetary tightening on growth and inflation, “we expect the RBI MPC to boost the policy rate by 25 basis points to 6.5 percent, followed by a protracted wait-and-watch approach,” the report stated.

The RBI is responsible for making sure that retail inflation stays at 4% with a margin of 2%. However, starting in January 2022, it was unable to keep the inflation rate below 6% for three straight quarters.

Although it went below the Reserve Bank of India’s upper tolerance level of 6% in November and December, retail inflation as measured by the Consumer Price Index (CPI) has shown signs of moderating.

According to Dhruv Agarwala, Group CEO of Housing.com, who expressed his expectations of the MPC, the RBI will likely stick to a moderate increase in its benchmark lending rate in the upcoming policy announcement before pausing hikes later in 2023 due to projections of slower growth than previously anticipated for 2023–24.

“Since home purchases are influenced by a variety of factors other than merely home loan rates, the action is anticipated to have a minimal impact on real estate demand.” However, because the EMIs for both new and current home loans would rise as a result of this rate increase, borrowers would feel the pain, he said.

A source from MNS stated that the monetary policy committee might soften its position on monetary tightening.

“The forecast for the world economy is still negative, though.” The domestic economy is strengthening and remaining resilient. High grain prices continue to exert more pressure on food inflation. Thus, the RBI may continue to prioritise the removal of accommodation while increasing the policy rate by 25 basis points, he said.

Another source stated that the MPC does not have many reasons for a further rate hike given the US Fed’s reduction of the increase’s magnitude to 25 basis points, the CPI remaining within the RBI’s tolerance range, the increase in the yield differential between the US and India to about 3.75 percentage points, the slowdown in exports, and the need to keep borrowing costs low for the public and private sectors.

Only the possibility that an early pause might cause inflation expectations to de-anchor would support raising interest rates. The arguments are weak on this front as well because our inflation is primarily demand-driven rather than supply-driven.

Therefore, from a signaling standpoint, we shouldn’t be surprised if the majority in the MPC really opts for a halt or a token hike of 10-15 bps in the repo rate.

Speaking recently at the 22nd FIMMDA-PDAI Annual Conference, RBI Governor Shaktikanta Das stated that central banks have begun what appears to be a pivot towards lower rate hikes or pauses as a result of some easing of COVID-related restrictions and cooling of inflation in various countries, though still elevated.

“They also keep repeating strongly how determined they are to reduce inflation to more manageable levels.” Going forward, it appears that high policy rates for a longer period of time are definitely possible. “In terms of growth, forecasts currently point to a milder recession as opposed to the severe and widespread recession that was predicted a few months ago,” he said.

Das claimed that the Indian economy has remained robust in this hostile and unsettling global climate by relying on its macroeconomic fundamentals.

Although there has been a nice easing in November and December 2022, he noted, “Our inflation remains excessive.” The Governor continued, “Core inflation, however, remains stubborn and high.”

The Fed is really concerned about inflation.

According to Fed policy theory, it takes time for the economy to adapt to stricter money controls when the central bank boosts interest rates.

Due to COVID-related variables, including congested supply chains and soaring demand for products over services, this particular round of inflation has begun. While extraordinary fiscal and monetary stimulus spurred growing costs for a number of goods and services, the war in Ukraine exacerbated already-rising gas prices.

Nearly the previous year, food costs have increased by over 10%. Data from the Labor Department up to December show that the price of eggs alone has increased by 60%, butter has increased by more than 31%, and lettuce has increased by 25%. Gas prices were gradually falling as of the end of 2022, but they suddenly shot up and are now at a national average of $3.50 a gallon, up about 30 cents from the previous month, according to AAA.

Although they have claimed that recent data indicates that pressures may be reducing, Fed policymakers have remained steadfast in their efforts to combat inflation. The consumer price index decreased 0.1% on a monthly basis in December and is up 6.5% from a year ago, down from its record of 9% last summer but still significantly higher than where the Fed feels comfortable.

Fed’s bond buying

In addition to raising interest rates, the Fed has been reducing the amount of bonds in its bond portfolio. The Fed has set a threshold of $95 billion in maturing bonds that it is allowing to roll off each month rather than reinvest, which has led to a drop of nearly $445 billion since June.

The San Francisco Fed estimates that the balance sheet decrease has been equivalent to an additional rate hike of around 2 percentage points. More than $8.4 trillion is still on the balance sheet.

The markets are waiting to see where the Fed will stop raising interest rates.

Members of the FOMC stated during the December meeting that they believe 5.1% to be the “terminal rate,” or the point at which the Fed believes policy is suitably restrictive. The Fed is expected to start lowering interest rates later this year after making one more quarter-point hike in March, according to market speculation that the actual figure is closer to 4.75%.

Powell said it’s “conceivable” for the funds rate to remain below 5% in response to a query from CNBC’s Steve Liesman. However, he added that barring a sharper decline in inflation, it is unlikely that the Fed will lower interest rates this year.