US stocks jumped after the rate hike of 0.75 per cent was announced by the Federal Reserve. If the next round of rate hikes is also on the expected ground, the markets may take it positively and may continue to rise. “The 75-basis points rate hike was widely expected and priced in the markets. The Fed chairman made it abundantly clear that Inflation remains the Fed’s top concern; so, rate hikes would continue. There was an indication that it can hike by another 75 basis points in the next FOMC meeting in September,” says Pankaj Pathak, Fund Manager, Quantum Mutual Fund
Rising rates have a direct impact on the growth of the economy. The US growth is already dwindling as can be seen from the recent data. The second-quarter US gross domestic product fell an annualized 0.9% after a 1.6% drop in the first three months of the year. “US has entered a techincal recession with second quarter GDP growth contracting by 0.2% quarter on quarter basis. This comes after the first-quarter gross domestic product data showing the US economy shrank by 1.6%. The contraction was led by weaker business inventory growth. However, personal consumption, which offers insight into the health of the US consumer, grew by 1%, indicating that the consumption is still reslient in the US. Going forward, recent Fed rate hikes are going to impact personal consumption and we might see further slowdown in the economy as rate hikes impact economy with a lag,” says Ritika Chhabra – Economist and Quant Analyst at Prabhudas Lilladher.
But, still, the markets are showing resilience at least in the near term. Dow 30, S&P 500, and Nasdaq, all closed higher on Thursday with US futures also in gree on Friday. “Markets took comfort from the fact that the Fed’s statement was more balanced this time. The fact that the FED’s statement started with an acknowledgment of slowing growth, indicates that the fed is turning increasingly attentive to growth risks as well. This resurrected the ‘FED PUT’ – an expectation that the FED will stop and then dial back rate hikes if the economy slows down materially,” adds Pathak.
Officially, it is still not a recession in the US until economists at the National Bureau of Economic Research deem it so.“Global markets are currently more focused on recession than inflation. Thus, market pricing is based on – the more they hike now, the more they will have to cut later,” says Pathak.
Companies are declaring their quarterly earnings and some of the firms from the big-tech space are putting up a stronger outlook. The current bounce may be a trap as many experts are calling it but long-term investors may continue to pick stocks of established companies at reasonable valuations and wait for the reversal to take place.