Fed rates: Having an impact - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Fed rates: Having an impact

Dec 10, 2003

The US Federal Reserve (the Fed), in its Federal Open Committee Meeting held yesterday, decided to keep the Fed funds' rate at its lowest since the last 45-years. While this move has not surprised many, let us discuss what implications does this have for the US economy and the global stock markets, including India.

As seen in the graph above, the Fed funds' rate has been on the steady decline since December 2000 (currently it stands at 1%, the lowest in the past 45 years). This has been a result of the Fed trying to kick start economic growth post the slowdown that started in early 2000. While the economy is showing signs of a turnaround, how sustainable would this be is still questionable. The US stock markets have been poured with a slew of positive reports from the labour, manufacturing and consumer markets and this has impacted the way the stock markets have moved in recent times. This has had a spill over effect on other markets as well, be it the Nikkei, the FTSE or the Dax.

Amidst all these positive reports, it has to be remembered that the key growth engine for the US economy has been the US consumer. The steady fall in interest rates has helped consumers to borrow more (housing, cars and personal) and as a result, demand has been on the healthier side. However, core issues like excess inventory and employment generation remains areas of concern for the Fed. Corporates have been downsizing payrolls over the last three years with threat of outsourcing also adding to the woes. While opinions vary about the strong GDP growth numbers in the last two quarters, it is too early to arrive at a conclusion.

Now, what implications does this movement in the Fed funds rate have on the Indian indices? One important factor aiding the current rally in the Indian equity markets (the BSE-Sensex has gained around 55% since January 2003) and that in other emerging nations is the rising levels of foreign institutional investments (FIIs). And the main attraction, apart from the obvious faster rate of growth has been lack of attractive return in US markets (both debt and equity). Though equity markets have risen in the recent past, there are apprehensions about current valuations. Therefore, if interest rate were to rise in the US market, the risk-return trade-off of investing in emerging markets becomes less favorable and therefore, the inflow could slowdown. Already countries like Australia and Britain have witnessed an increase in interest rates (in the case of Australia, two times) in order to steady economic growth.

Investors in the Indian stock markets have gained tremendously on the back of the rally witnessed in these markets. While internal factors like strong underlying fundamentals supported by valuations have acted as a strong positive, expectations on the FII inflow front have to be softened. Investing just because markets are 'expected' to touch new highs would not be prudent in any market. And more so in times like these, when temptations are aplenty, investors need to have a well-understood view of their risk-return profile and have a long-term investment horizon (3 to 5 years).

Equitymaster requests your view! Post a comment on "Fed rates: Having an impact". Click here!


More Views on News

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

Sundaram Bluechip Fund: Will Hold the Stable Horses (Outside View)

Sep 18, 2020

PersonalFn briefly outlines the newly launched NFO note HSBC Corporate Bond Fund.

Wait! Don't Chase Smallcaps Now (Profit Hunter)

Sep 18, 2020

Let the markets take a breather before you jump in.

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...

A Contrarian View on Whether You Should Load Up on Small Caps podcast (Views On News)

Sep 17, 2020

Rahul Shah discusses whether the SEBI circular is the perfect time to start investing in good quality small caps

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

I Recommended this Stock over Page Industries because it's Relevant to Doubling Your Income (Profit Hunter)

Sep 7, 2020

Things are not often what they seem in the market and how you can take advantage of this.

The NASDAQ Whale Could Harm Your Portfolio (Fast Profits Daily)

Sep 7, 2020

The discovery of Softbank pushing up prices on the NASDAQ will cause volatility in the market. Stay alert!

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 18, 2020 (Close)