We are close to an year behind after the Fed ended its Quantitative easing programme. Ever since that event, global stock markets have been subjected to the uncertainty looming nearly every fortnight in anticipation of the Fed hiking interest rates. Although this has become a laughable event, the world is reacting differently.
It is about 7 years since the Fed brought down the interest rates pretty close to zero in the expectation that it would bolster an economy that was sagging. It is this policy of somewhat artificial support to the economy that is now expected to change.
To comprehend the interest cycle in the U.S., we should dig deeper and understand the fast changing demographic structure. In a consumption driven economy, the core population holds the key and that is the age group between 15 and 64. Presently, this core population is declining and the trend is likely to continue for another decade in the least. Historically interest rates have been linked to the core population because that drives consumption.
It is a moment of challenges for the Fed as well as the markets around the globe. Going by past experiences, whatever be the rate hike (and assuming it does come), knee jerk reactions are inevitable. But, the other side of the coin is that the patient (read economy) cannot survive on the support system eternally. It must be taken out and allowed to start walking again, on its own strength. This is more easily said than done because, the Fed is compelled to balance its act on a razor thin edge.
Read more: Benchmarks end higher ahead of Fed rate hike decision
The Fed has gone farther than merely holding the interest rates and a more significant measure was buying up mortgage securities and other bonds. This measure helped in pegging the interest rates down further. This quantitative easing mechanism launched by the Fed did help in more funds being borrowed. With happier borrowers and money available to lend, the stock markets revived and just weeks before the Chinese debacle, the major indices had broken its past records on its march forward.
Since March last, Fed officials have been saying that the interest rates may be raised sometime during the current year. And once again, the September meeting of the Fed has passed off with the rates remaining untouched. Therefore, using the knee jerk reactions prudently to focus on the Indian stock markets should be a profitable measure.
As for the Indian stock markets, a Fed rate hike is perhaps already factored in and particularly so since the markets are presently in a phase of consolidation after the Chinese induced debacle. Most experts also believe that the sooner a rate hike decision comes, the better for the markets. A silver lining in the cloud will be that at least some of the FIIs would be compelled to take a fresh look at the Indian stock market. In terms of inherent strength in the economy, India is right at the top in the Asian region.
Here is a very interesting article on what a Fed rate hike could mean to the global stock markets.