US Central Bank: Interest rate hikes paused, hints towards future rate hikes!

Key Points

• The US Central Bank left its benchmark interest rates unchanged in its June 2023 meeting.
• The central bank hinted that interest rates will likely increase another half a percentage point by the end of this year.
• Current interest rates are between 5% and 5.25%
• This marks the first pause after 10 consecutive interest rate hikes.

US Interest Rates: Interest rates hike paused, but US Fed hints towards rate hikes later this year!

The US Central Bank left benchmark interest rates unchanged in June 2023, after 10 consecutive rate hikes in order to calm recession fears and spur economic growth. 

However, the incessant rate hikes over the past one year was supposed to help calm inflation pressures, latest consumer price inflation of 4% is still higher than the US Fed inflation target rate of 2%. This led central bank chief Jerome Powell during his speech to hint towards a 50 bps rate hike towards the end of this year to help stem rising cost pressures. 

US Interest Rates: Link between inflation and interest rates

The Fed’s decision to reduce the size of its latest rate hike follows last month’s economic data showing US inflation easing to 4% from the 6.5% seen in January 2023. Even as inflation has cooled, it is still quite higher than the 2% inflation rate targeted by the US central bank. 

The world continues to struggle with inflationary pressures brought on by a harmful concoction of economic forces. These include escalating energy costs, which are made worse by the conflict in Ukraine, as well as a number of supply chain constraints brought on by the Covid-19 outbreak.

The increase in interest rates since 2022 was also was a key cause of the recent banking system fallout. Silicon Valley Bank, Signature Bank and First Republic Bank all crashed majorly due to an asset mismatch caused due to higher interest rates. 

US Interest Rates: Sector Most Affected

Technology stocks:

Technology shares are most sensitive to interest rate changes. Investors generally look at these stocks for their potential of higher future returns or in investment terminology: growth stocks. 

Whenever interest rates jump, it dampens the future earning capacity of these companies and hence are less attractive to investors. Normally technology stocks do not perform well in a high interest rates setting.

The Nasdaq 100, an index which contains the top technology stocks in the US generally drops whenever the US central bank raises interest rates. 

How does US Fed rates impact the Indian economy?

Weaker Rupee: With increasing interest rates in the US, the Indian market will become less attractive to foreign investors. A rising trade deficit, owing to growth in imports outpacing exports, and several other factors have already caused the Indian rupee to weaken. The latest rate hike by the US Fed will improve yields on US treasuries and reinforce the Dollar’s strength against the rupee.

Worsening inflation in India: India’s inflation rate may accelerate as a result of the Fed rate hike. Depreciation of the rupee will increase the rupee cost of imported goods such as chemicals and fertilizers, electronics, crude oil, and active pharmaceutical ingredients.

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