Cues from US Fed's Policy Meet...

Fri, 30 Oct Pre-Open

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The US Fed has kept its interest rates unchanged. The Federal Open Markets Committee (FOMC) came out of its October meeting on Wednesday and kept rates at the 0.25% level. However, they downplayed the global economic concerns that were stressed earlier.

The tone of its statements however did give some pointers about what the Fed will be considering in its December meeting. Let's note some of them and understand what they have to say.

December hike still on table

Many consider that the probability of a rate hike has increased. The Fed has said that it will consider the decision in the December meeting. Of the 17-member committee, 13 feel that the FOMC will raise rates by 2015.

Unity in assessment

The decision came out as unanimous. Only one member of the FOMC dissented on the latest decision. This was seen as an accomplishment for chairperson Janet Yellen as the views were diverse during the weeks leading up to the meeting.

Global concerns have ebbed

The reasons why the Federal Reserve has not raised rates yet are the concerns about the fragility of the economy. While the Fed stressed global concerns in its September announcement, markets have calmed from those levels.

China had affected most of the global markets in the third quarter. The Fed has thus been taking a conservative approach. However, the current situation portrays a different picture. Chinese GDP numbers came in slightly better than expected. Also recently, the Peoples Bank of China (PBoC) lowered its interest rates and the Chinese government has injected further liquidity.

Evidently, the Fed seems to be less worried now. Its statements this time did not mention any global concerns that may affect its decision going forward. It looks like even if the policy makers will be cautious about the emerging markets, they are not as worried about these factor as they were during their earlier meet.

Improvement in the US economy

The statement highlighted that many segments of the US economy are doing well. It stated that household spending has been increasing in recent months. Business fixed investment also surged at good enough rates. This was also seen as an aid to wage gains and higher inflation.

None of these levels were seen since the US financial crisis broke out. This is likely to influence the decision.

What can be expected?

Many expect that there could be a rate hike in December. Either ways, speculation on this front can take the global stock markets into volatility. For Indian markets, which are strongly influenced by the foreign institutional investors (FIIs), a rate cut can mean foreign funds flowing out of India. In the eventuality that this happens, it could mean a fall in markets.

However, this can prove out to be a good thing. A crash does not necessarily affect the business fundamentals. In fact, companies with durable moat will be favored in such situations. A crash will bring shares of these companies at lower levels. And this can be an opportunity for value investors to take advantage of this situation and the consequent opportunities.

All said and done, only time will tell whether the Fed will actually go ahead and raise rates during its December meeting.