As expected, the US Federal Reserve raised the interest rates by 25 basis points (bps) for the first time in nearly a decade, easing speculation that persisted across the global markets over the past two years.
In theory, monetary tightening by the US central bank is a major negative for global markets, particularly emerging markets including India, as a strengthening US dollar amid rising interest rates in the world's largest economy could lead to heavy outflows from these markets.
In contrast, most of the global markets rallied after the US Fed rate hike as they expected it to go slow on further policy tightening in the coming months.
Domestic benchmark equity indices rose sharply on Thursday, with BSE Sensex and Nifty ending 309 points and 93 points higher, respectively.
Here is what analysts say about the US Fed rate hike:
The Fed's data-dependent policy stance remains. The committee will continue to view each meeting as "live" in terms of a decision to raise rates further and will "assess realised and expected economic conditions" in "determining the timing and size of future adjustments".— Barclays Capital.
We stick to the view that rising inflation pressures will imply the pace of Fed tightening during 2016 will be faster than is currently priced in by markets. At present, the market is priced for about two hikes in 2016 compared to four hikes in the FOMC's dot plot and our own forecast. After Wednesday's move, we believe the Fed will hike rates again in March. At this juncture, we do not expect the Fed to start letting its balance sheet shrink until H2 2016 at the earliest.— Nordea Markets.
Our view is still that inflation will rebound much more rapidly than the Fed believes in the first half of next year, as the deflationary pressure from lower commodity prices and the surge in the dollar begin to fade, while domestic price pressures continue to build. As a result, we expect the fed funds rate to reach almost 2% by the end of next year.—Capital Economics.
We anticipate that the committee will increase the Fed Funds Rate four times in 2016 and another four times in 2017. Key to this view will be continued momentum in the labour market and a firming in global growth; both are necessary to mitigate downside risks to the outlook. – Westpac Institutional Bank.