Yellen‘S Verdict: What It Means For Indian Market

The wait was finally over; the whole financial world was glued to 7.30 PM Indian time yesterday when Fed Chair Lady Janet Yellen delivered a speech on “The Federal Reserve’s Monetary Policy Toolkit.”

The highlights of the speech gave various hints.  One among many was that the U.S economy is now nearing the Federal Reserve’s statutory goals of maximum employment and price stability. She also indicated that the FOMC could see moderate growth in real GDP and additional strengthening of the labor market. Fed Chair Lady has also hinted on the inflation rising to 2% in the next few years. Based on this economic outlook, the FOMC continues to be hopeful that the gradual increases in the Federal Funds Rate will be apposite over time for achieving and sustaining employment and inflation near their statutory objectives.

The chance for an increase in the Federal Funds Rate has strengthened in the recent months, in the light of the unrelenting concrete performance of the Labor Market and their outlook for the Economic activity and inflation. However, the decisions depend on the extent to which the incoming data continues to confirm the Committee’s outlook.

This being the single-most indication of her belief that Fed goals of maximum employment along with 2% inflation target will be achieved. This brings us closer to the short term increase in interest rates. However, the markets should view it as positive, as 2% inflation target should not be reached either by September or December which was being touted for increasing short-term rates.

Yellen also believed that the FOMC summary of economic projection of 0-3.25% at the end of 2017 is an indication that they are at the lower end of the curve. If the economic data gets better and August payrolls are to be announced on Friday, 2nd September, then the gates to rate hike can be opened in September meeting.

The markets became positive after the meeting and global markets went up with S&P futures going up by 15 points from 2170-2186, and gold being up but the joy was short lived with another Fed board member Stanley Fisher stating two interest hikes were coming soon which led to uncertainty in the markets as there were confusing signals and S&P futures fell 30 points to give a down close.

Going forward, Indian markets will open lower on Monday following American market. The mood of uncertainty will continue forward. We are heading to nonfarm payroll data as Fed meets in September to decide on the next course of actions.