Moneycontrol Pro Panorama | The more the Fed gives, the more the market wants

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Moneycontrol Pro Panorama | The more the Fed gives, the more the market wants In today's edition of Moneycontrol Pro Panorama: COP28 holds little importance for NTPC investors, regional political parties and dynasties, generative AI a cybersecurity challenge for businesses, NPS needs more strengthening, and more MANAS CHAKRAVARTY DECEMBER 15, 2023 / 02:52 PM IST      

Dear Reader , The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. Fed chair Jerome Powell and the Federal Open Market Committee finally delivered on the much-awaited pivot in the policy rate. But the Fed Funds market was already sceptical of Powell’s rather dubious ‘’higher-for-longer’’ stance and had pencilled in rate cuts amounting to 100 basis points by December 2024, even before the latest FOMC announcement. In other words, despite the September 2023 FOMC members’ median estimate of the target Fed Funds rate being 5.1 percent by December 2024, the Fed Funds futures market, as on 6 th December 2023, was

pricing in the probability of the policy rate being 400-425 basis points or lower in December 2024 ( Please see accompanying chart ). You May Like A 1Cr Term Plan which Covers Your Life as well as Critical Illnesses ₹ MaxLife Term Plan Get Quote by Taboola Sponsored Links RELATED STORIES 

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Moneycontrol Pro Panorama | Correction signals caution!  Light at the end of this tunnel — A case for optimism in startup ecosystem  Narendra Modi: ‘Our nation is on the cusp of a take- off’ The FOMC now says its median estimate for the Fed Funds Futures rate in December 2024 is 4.6 percent, which implies 75 basis points of rate cuts. That is still higher than the 4-4.25 percent priced in before the Fed announcement on 6 th December.

A section of the market, looking at the runaway rallies in the equity and bond markets and the consequent easing of financial conditions, had expected the Fed to sound hawkish, which is why there was a bit of a pullback in the Fed Funds futures market a day before the announcement. But the probability was still a huge 76.7 percent that the Fed would be forced to cut its policy rate to 4.5 percent or below by December 2024. So, most of the lower median estimate of the Fed Funds rate had already been priced in. But the chart shows that, as soon as the FOMC acknowledged that the market was right, the market wanted more. After the FOMC announcement, the Fed Funds futures market now pencils in a 73 percent probability that the Fed Funds futures rate will be 375-400 basis points or below by December 2024. In short, it’s now expecting rate cuts of 150 basis points or more in 2024. The more the Fed gives, the more the market wants. Fed chair Powell has fanned the market fires. So far, the assumption was that the Fed would cut rates only if a recession loomed ahead. But Powell now says the Fed doesn’t need a recession to cut rates. “It could just be a sign that the economy is normalizing and doesn't need the tight policy,” he said. Even a soft landing would lead to lower rates—it’s Goldilocks on steroids for the markets. The markets are also pricing in faster rate cuts. They now expect a rate cut of 25 basis points by the FOMC as early as March 2024. Before the latest FOMC announcement, the

betting was that the first rate-cut would happen in May— now there’s a 70 percent probability that the Fed Funds rate would be cut to 500-525 basis points in March and a 17 percent probability it would be cut to 475-500 basis points then. To be sure, part of the rally was on account of the bears being caught unawares and the consequent short covering. But the equity markets are rallying hard to price in the new signals from the Fed Funds futures. My colleague Anubhav Sahu has pointed out the implications of the Fed pivot for Indian investors . Investing insights from our research team MC Pro’s New Year 2023 portfolio has delivered a stunning 48 percent one-year return ITC: Moderation in growth trajectory across cigarette, FMCG businesses Inox India IPO offers a long-term compounding opportunity What else are we reading? Sony faces Hobson’s choice with Zee merger COP28 plays with words to clinch consensus Why COP28 matters little for NTPC investors Why are regional parties full of political dynasts? Tackling the generative AI challenge in cybersecurity for businesses Chart of the Day: Renewables capacity growth patchy

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Jay Powell reveals Federal Reserve’s hand on US interest rates (republished from the FT) COP28 deal is missing one big thing: Money Words Matter, Actions Too: Leadership lessons from the Ivy League Pension Scheme Dilemma: OPS is fiscally unstable while NPS needs more strengthening New bank rules are bad for the West, worse for the rest Tesla’s EV recall is bad for Its autonomous car rivals Personal Finance Sensex @70,000: How to book profit Technical Picks: Hindustan Unilever , Aurobindo Pharma , Jindal Stainless , Jeera , and Ashoka Buildcon (These are published every trading day before markets open and can be read on the app).

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