Quick Take | US Fed gives in to market expectations; stance supportive of EM assets While the US Fed continues to emphasise that US economy is fine fettle with labour market dynamics and wage growth improving, cross currents across the globe remain concerning

It may not be an exaggeration to say that US Fed delivered what market was hoping for — a pause in rate hikes in monetary policy which may extend beyond Jan meeting.

Few aspects that qualify this pause are as follows. Fed removed reference to “some further gradual increases" and rather stated that case for raising rates has weakened. The shift in Fed’s stance has been amusing over last two months.  From November 28, Powell’s mention of policy rate is below the neutral rate to an admission now that policy rate is within the range of neutral rate sums up change in Fed’s assessment of the global economic situation.

While the US Fed continues to emphasise that US economy is fine fettle with labour market dynamics and wage growth improving, cross currents across the globe remain concerning. Economic slowdown in China and Europe, Brexit uncertainty and tightness in financial conditions are clearly now a vital parameter for the Fed to assess future policy path.

This is a clear departure from the stance few months back. Fed is clearly implying that US economy and particularly policy rate path is not decoupled from international developments. Another feature which keeps a lid on rate hike is that inflationary pressures have subsided recently.Further, intention for balance sheet flexibility was on offer. A statement on the Fed’s balance sheet implies it can consider adjusting reduction of the bank’s bond portfolio, if required. This suggests that Fed is getting more pragmatic in dealing with the liquidity adjustment. This is another departure from the past where in balance sheet unwinding was seen on an auto pilot adjustment in the background. Fed suggest that it will finalise balance sheet plans in coming months.Market reaction followed the playbook. S&P 500 rose 1.5 percent, US dollar index and 10-year yield slipped lower. Relatively patient and accommodative Fed’s stance is expected to be supportive for EM asset classes.In the hindsight, last two months of Fed’s communication with the market seems to be a soft landing of policy tightening cycle. 

Follow @anubhavsays

First Published on Jan 31, 2019 08:30 am moneycontrolnews