FED SITS TIGHT BUT OUR EYES ONLY ON 1ST FEB

about 2 months ago
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As was widely expected, almost all analysts were unanimous that the Federal Reserve will sit tight and do nothing this time. And they were right!

The Federal Reserve, after lowering rates three times last year, decided to do nothing, maintain a status quo this time around and continue with their wait-and-watch vigil. In many ways, one can say that the pressure is off for the Fed, at least in the near term and the Chairman, Jerome Powell, pretty much stuck to the same tone and script.

If one may recollect, at the end of 2019 itself, the Fed had indicated that it does not plan to change rates at all in whole of 2019. But in an election year, we do not think the Fed will be able to keep its word.

For now things are looking good for USA, with recession fears fading, unemployment is stated to be at a 50-year low and more importantly, the stock market remains high. But lurking in the corner of this happy picture is the danger of coronavirus and the new tariff war which Trump threatens to unleash, this time with Europe. We do not know yet how much damage the coronavirus will cause or how much it will spread but the economic impact of this, if it spreads will roll out all over the world.

While rates were expected to be kept untouched, there was wide spread expectation about more clarity coming in on the Fed’s bond buying program since Sept’19. The Fed chairman insists on asserting that it is not a buying program like the QE it had post 2008 but if it is not QE, what is it? And how come the Fed buying is indeed helping the markets?  Since Sept, some $400 billion has been added to the treasury – so will more come or will this buying finally start tapering off as the economy is doing well?

The Fed said that the it will continue to buy Treasure Bills, which is not QE as insisted by the Fed, will continue onto April, 2020.

The quick highlights of the Policy:

  • Left its benchmark interest rate unchanged
  • Interest rate paid on bank deposits, or reserves held at the Fed, raised to 1.6% from 1.55%.
  • Overall inflation and inflation for items other than food and energy are running below 2%.
  • So that’s was that… nothing really different from its previous policy.

And how does this affect the Indian markets? Nothing much really. It was as such expected to be a status quo. The Indian markets are now looking only inwards and not at the global cues as the D-day – the Union Budget day draws closer. Everything else right now – the virus, the Fed, the Brexit, everything will remain only in the periphery of the picture, out-of-focus, but there.

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