If markets were expecting the latest US Federal Open Market Committee (FOMC) meeting to offer clear direction on when policy rates would be cut and by how much, they were in for a disaappointment. After announcing the target funds rate would remain at 5.25-5.5 per cent for now, the FOMC merely said that it would ‘not be appropriate’ to reduce rates until it gained greater confidence that inflation was moving ‘sustainably’ towards 2 per cent.

But reading between the lines, the statement had dovish undertones. It talked of the Fed’s ‘dual goals’ of achieving maximum employment with a 2 per cent inflation rate. There was no hint that rate hikes were on the table. The markets were apprehensive about a hawkish pivot, after recent data showed US consumer price inflation rising from 3.1 per cent to 3.5 per cent between January and March 2024. But data released after this event also buttressed the view that the US Fed will be on an easing path from here. US GDP for Q1 2024 expanded by just 1.6 per cent, while non-farm payrolls for April showed a weakening job market.

Projections on macro variables from the FOMC members — which are more keenly watched than the policy statement — showed them making no change to their interest rate forecast for 2024 at 4.6 per cent. But the 2025 forecast was moved up to 3.9 per cent from 3.6 per cent, suggesting shallower cuts. They also turned more optimistic about the US economy, forecasting GDP growth at 2.1 per cent and 2 per cent in 2024 and 2025, significantly up from 1.4 per cent and 1.8 per cent earlier. Should these numbers come good, the US could well escape the hard-landing feared after rate hikes of over 500 basis points. This should be good news for the global economy and financial markets, including India’s, which have always caught a cold when the US sneezed.

Another important policy announcement which is positive for markets, is the Fed's decision to slow the pace at which it has been shrinking its balance sheet. After ratcheting up its balance sheet to $9 trillion during Covid to pump-prime the economy, the Fed has been trying to reduce this bond stockpile since June 2022 in a quantitative tightening (QT) exercise. The withdrawal of this large quantum of liquidity had the potential to cause significant turbulence not only in the US, but also in global financial markets.

With the balance sheet at $7.4 trillion, the Fed has now announced its intent to slow down its monthly QT from $95 billion to $35 billion. This effectively allows the US stimulus that has propped up asset markets to remain in place for longer. But it also fans fears about what the long-term end-game will be. In the past year, the Reserve Bank of India has been able to delink its monetary policy decisions from US Fed moves due to robust domestic prospects. But a slower pace of QT will mean that it will continue to have its task cut out in managing volatile foreign flows.