A HO-HUM, BORING KIND OF FED POLICY

By Ruma Dubey

It was a ho-hum, oh-so-boring kind of a Fed Reserve policy. There was nothing which was unexpected; no new news.

So the Fed kept the interest rate unchanged at 1.50 to1.75% and decided to stick to its pre-decided inflation trajectory. Yes, no intention whatsoever of veering anywhere away from the inflation goal though last week inflation rose for the first time, hitting the target of 2%. Thus the Fed did not go beyond welcoming the recent inflation data and kept the statement boring and predictable.

This again means that expectations of a rate hike in June remain intact. The economic data last week showed that the growth rate in Q1 for USA had cooled to 2.3% after being over 3% for the previous three quarters. Paying not much heed to this, the Fed maintained its statement of last time saying that the near term risks t the economic outlook were roughly balanced.

The Fed also refrained from signaling anything new on its “neutral” stance. All in all, it continued to maintain the same policy language that it has used in the past. As expected, there were no dissenting votes among the FOMC members – all voted for the status quo.

And yes, there was really nothing more on the previously mentioned plan on balance sheet trimming. Mum was the word on that too!

So what did the Fed statement say?

Here are the highlights:

• On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

• Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.

• Inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term.

• Risks to the economic outlook appear roughly balanced.

• Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent.

• The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

• The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

So you see, nothing new to add at all.

How will the Indian markets, which were waiting for the Fed statement, react to this nothing-happened kind of policy? Well, it will be back to stock specific action and earnings will decide the mood. Tomorrow, results of some companies like Adani Power, Adani Port, HCC, IRB, MRF, PNB Housing, L&T Finance Holdings, Orient Cement, Renuka Sugars will be closely watched.

The Karnataka election is being held on 12th May and results on 15th May – this will be closely watched to once again get a gauge on the Modi magic – will it work or will Congress retain this state? This too to a large extent will have an impact on the market.