FINALLY, THE US FED HIKES RATES BY 0.25%

By Ruma Dubey

A rate hike was a given. If it had not happened, it would have been a shocker for the entire world. The last policy of 2016 and the rates have been finally raised – the only hike this year.

The much anticipated 25 bps or 0.25% rate hike finally came in and the Fed said that the rate hike decision was unanimous.

A quick look at the highlights:

• US Fed hikes interest rate by 0.25%; sets range of 0.5% to 0.75%
• Fed forecasts three rates hikes in 2017, up from two mentioned in September
• See three rate hikes in 2017, 2018 and 2019 each
• Dow Jones hits record high after the Fed rate hike but soon slumped into the red
• See slightly higher GDP in 2016, 2017 and in 2019; unchanged in 2018
• Economic activity expanding at moderate pace
• Labor market has continued to strengthen; unemployment rate has declined
• The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2% inflation

Wow! This was much, much more than what was expected; not the 25 bps rate hike but three hikes next year was surely a surprise. In many ways that’s a signal – the Fed expects the US economy to grow, maybe overheat and that means that it is also giving a thumbs-up to the expected policies of Trump. Yet at the same time, by keeping growth and inflation targets at the same levels as was given before the elections in September, maybe the Fed feels its too early to bite into the Trump growth story which the US markets are convinced about. Thus at this stage it is very apparent that the Fed does not buy Trump's growth story.

Bot more than the rate hike, what held more importance was the Fed statement. What mattered more was what signal the Fed send out, in terms of rates for 2017 and ahead? And remember, this is the first Fed meet after Trump was elected and expectations are huge in terms of lesser regulations and lower taxes, which in turn is expected to give impetus to growth.

What does this rate hike mean for Indian markets? There could be a knee-jerk reaction to this already factored in event; that’s about it. This news has been around for so long now, ever since June, we have been expecting a rate hike. Thus it is good for the world, for India and all of us as the US Fed hikes rate and ends this year-long ongoing uncertainty.

The general fear is that if Fed hikes rate, FIIs will scoot from India. This fear is once again too farfetched.  All those who wanted to quit are already out and those who wanted in, who have faith in India’s growth story are surely still around.

And look at it logically. Is our Indian economy so fragile that FIIs leaving will pull out the every foundation of our markets? Why this fear? During the global turmoil, when FIIs were indeed leaving, domestic institutions and LIC held steed. Do you know that collectively they both can hold the fort and LIC’s investment alone is equal to all FIIs put together?

So lets be very logical about this. The Fed needs to do what it see’s befitting its country and India, directly will not face a hit. As we keep on reiterating, the entire market runs on sentiments. If the moods turnaround, all this gloom will overnight turn into boom. And to change those sentiments, we need some stimulus, some policy announcement which will buoy the sentiments. Maybe a functioning Parliament is what we all want to see; that’s the only thing which will pull up over long drawn faces.