All Eyes On The US Fed Meeting On Wednesday? Here Are Things To Know

The Federal Reserve is widely expected to hold interest rates steady on Wednesday as inflation cooled off last month and growth accelerated faster than expected in the third quarter but the central bank will keep door open for future hikes later in the year or in 2024.

Investors will closely watch Fed Chair Jerome Powell's statement when he speaks in a press conference Wednesday afternoon for signals about the Fed's willingness to raise interest rates at future meetings.

The Federal Open Market Committee kept its fed funds rate unchanged when it last met in September, after raising it to a range of 5.25 percent to 5.50 percent in July. The American economy has been feeling the heat from sky high inflation for the past two years but prices have recently fallen to hover around 3 percent from a peak of 9 percent in June 2022.

Core PCE index or Fed's preferred inflation gauge, has soften to 3.7 percent in September compared with 3.8 percent in August.

"Following the cautious guidance provided by Fed speakers over recent weeks, and reinforced by Chair Powell in his latest speech, we no longer expect the Fed to hike in its November meeting. Instead, we now expect the Fed to deliver a final 25 bps hike in the December meeting, as we still believe that robust activity data will likely be enough to tilt the Fed towards an additional hike," said Claudio Irigoyen, head of global economics, BofA Global Research.

"However, there is a substantial risk that the Fed may have reached the peak of the hiking cycle. This risk could materialize in the recent string of stronger-than-expected data were to fade, leaving room for a slowdown towards the end of the year as the impact of higher long-term real interest rates and tighter financial conditions continues to sink in. A potential government shutdown is an additional risk."

What Does This Mean For the Reserve Bank of India?

If the US economy remains robust to withstand the policy headwind, the interest rate differential between EM Asia and the US will likely persist through 2024, creating pressure on FX & capital movement. In the bearish and unlikely scenario where the prolonged higher rate eventually triggers a hard landing in the US, the shock on real economy and spillover to financial markets could have significant ramifications across the region, according to a BofA report.

If the US somehow skips the recession, the RBI will probably hike once more in December before pausing. But pressure on the rupee will prevail. The Indian currency is expected to remain weak in the coming year.

"(Fed) officials will not want to give the market the excuse to backtrack on the recent repricing of "higher for longer" policy interest rates. They will continue to leave the door open for additional policy rate rises should data justify it, fearing that a signal that policy has peaked could tempt traders to drive market rates lower in anticipation that the next move would be rate cuts. Such action could potentially reignite inflation pressures, but we doubt it," said James Knightley, chief international economist at ING.