Fed is likely to keep rates unchanged but commentary will be crucial for markets: Experts
By Nikhil Dedha
New Delhi, June 18 (ANI): As the US Federal Reserve gears up for its latest policy announcements, economists and market experts believe that the central bank is likely to keep interest rates unchanged, while keeping the door open for future rate cuts later this year.
The federal funds rate currently stands in the range of 4.25 per cent to 4.50 per cent, and the Fed has consistently signalled caution in changing its stance amidst global uncertainty and domestic fiscal challenges.
Sonal Badhan, Economics Specialist at Bank of Baroda, told ANI, 'We expect Fed to keep rates unchanged as it has guided on multiple occasions that the central bank will keep a watchful eye on impact of tariffs and its impact on inflation before cutting rates. We expect next rate cut by Fed in Sep'25.'
Recent auctions of long-term US Treasury bonds have shown weak investor interest, raising questions about the fiscal outlook of the United States.
Addressing this, Badhan added, 'Weak demand from investors is mainly reflective of lower confidence in fiscal health of the government and growth scenario. Inflated debt levels of the US government and recent tax bill is a major point of contention between investors and the government. Even Fed has highlighted concerns regarding the same as it has an inflationary impact on the economy'.
She also pointed out that the ongoing tariff war uncertainty has lowered growth prospects, prompting foreign investors to diversify their portfolios.
However, she clarified, 'We do not see movement in yields to have an impact on Fed's decision.'
For India, the implications of Fed's decision are significant. 'We are currently seeing a spread of around 180-190 bps between India and US 10-year g-secs. Historically, on average we have seen a 300-400 bps gap. If Fed decides to cut rates, the spread will increase and help support capital inflows and the rupee,' Badhan noted.
Banking and market expert Ajay Bagga in an exclusive conversation with ANI also echoed the view that a rate cut is unlikely in the ongoing Fed meet.
'No rate cut but two months of slow retail consumption numbers may lead to a more dovish commentary. Dot plot will be watched for hints towards rate cut timing and magnitude. Markets are factoring in September and December cuts,' he said.
Bagga pointed to robust Q2 projections and said, 'Atlanta Fed GDP Now is showing a 3.5 per cent yoy growth projection for Q2 US GDP. So Powell will not be in a rush to cut, given energy cost spikes due to Iran conflict could yet reverse the inflation trajectory.'
He added, 'Expect Powell to be more dovish in his press conference than the one-page policy statement. Trump is putting a lot of pressure on Powell to cut rates but policy uncertainty is holding back the Fed.'
However Debopam Chaudhuri, Chief Economist at Piramal Group, expects a rate cut in this cycle.
He told ANI 'I expect the FOMC to deliver at least two rate cuts of 25 bps each over the next five meetings scheduled in 2025, including the one in June.'
However, he added that 'While June presented a favourable window for the first cut, given easing inflation and slowing growth, the renewed Iran-Israel conflict and its potential impact on energy prices may prompt the Fed to defer action until the July meeting.'
Chaudhuri highlighted that by the end of 2025, the upper bound of the Fed funds rate could ease to around 4 per cent.
The Federal Reserve's decision will come late on Wednesday, while most of the experts expects the rate to remain steady for now, but the commentary will be crucial not just for the US economy, but also for global markets, including India's monetary and capital flow dynamics. (ANI)
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