Fed U-turn likely if US enters recession but risk-appetite may only gradually increase

Final estimates for GDP for the March quarter in the US suggested the world’s largest economy shrank 1.6 percent in the quarter. but at the same time, irrigated Chair Jerome Powell made a do-it-yourself statement, saying the Fed will not allow the economy to slip into a high inflation regime, even if it means raising interest rates to levels that risk growth.

If the US economy, or for that matter, developed markets, slows, it will exacerbate demand concerns and could affect commodity prices. The recent surge in COVID cases in China and its impact on metals is the latest example. Analysts said a fall in commodity prices could dampen inflation globally and prompt the Fed to go on a slow or even reverse rate hike. ETMarkets Mid Year SurveyHaving said that the immediate period could be painful for domestic equities as FPI sell-offs could intensify.

Securities expect the bearish environment to allay inflation concerns. This would address the Fed’s primary concern for maintaining price stability, adding that interest rates in that case would not rise as participants expected in the current scenario.



“But with growth going to zero, it would be foolish to expect the equity market to perform well,” the brokerage said.

Deepak Jasani The Securities and Exchange Board of India said that even though the US Fed is expected to start cutting rates as soon as it enters the economy recessionThis may not result in an immediate turnaround in the equity markets as the risk appetite may take its time to build up.

There is an old saying: When America sneezes, the world catches a cold. Analysts said the US slowdown would have a contagious effect on other economies. Historically, whenever commodity prices have risen, most likely, there has been a recession, said Yasha ShahHead of Equity Research, Samco Securities.

“This is also why, globally, the sell-off continues. In the past several deep market corrections and recessions, when the Fed intervened and loosened monetary policy, the market stopped falling. Not likely now, given the interest The rates are lower than the rate of inflation. So if a slowdown strikes, it may be challenging for the equity markets to maintain their grip,” Shah said.

data shown FPI It has sold equity worth Rs 2,17,049 crore so far in 2022. This is against an inflow of Rs 25,752 crore in 2021.

Pankaj Pandey, head of research at ICICIDirect, said the US slowdown will impact global markets, as flows continue to dry up, even as he fears an impending slowdown will, inevitably, cause the Fed to slow down the growth cycle. can force you to leave.

“However, more important than the slowdown is the weakening of the inflationary cycle, which we feel may begin to show if the crude oil and commodity cycles begin to reverse,” Pandey said.

Vineet Bolinjkar, Head of Research,

Securities, said one can find many articles about the disintegration of economies, none of the major world economy can disintegrate in today’s world given the high interdependence after globalization. He said that in the event of a slowdown in the US markets, there is a possibility of a fall in the global markets as well.

Meanwhile, some analysts like Yash Gupta, equity research analyst at Angel One, believe that any slowdown in the US is expected to be short-lived and that once the global supply chain issue is settled, the Fed’s stance may also change. Will go

“Globally, equity markets have seen heavy selloff following central bank actions and more or less rate hikes and liquidity reduction,” Gupta said.

Nishit Master, Portfolio Manager, Axis Securities said that if inflation eases due to lack of demand coupled with the US slowdown, there will be a change in the US Fed’s stance. In such a situation, easy monetary policy would be good for the Indian markets.

“On the other hand, if the recession is not followed, if inflation becomes significantly lower, the US Fed will not be in a position to ease its monetary policy and will create a double whammy for global and Indian markets as liquidity conditions prevail. will remain tight while demand from the world’s largest economy will also slow down,” he said.

Puneet Patni, Equity Research Analyst,

, also sees the recession as short-term. He felt that after heavy selling at global level, markets are more or less easing the rate hike and liquidity crunch.

Shiv Chanani of Elara Securities India said, “We expect the Fed to be proactive in dealing with recessionary pressures and take appropriate measures to ensure that there is no continuing weakness in the economy.”

(Disclaimer: Recommendations, suggestions, views and opinions given by experts are their own. They do not represent the views of The Economic Times)