Fed’s Rate Halt and Fiscal Expansion Could Boost Emerging Markets

The US Federal Reserve’s decision to pause its rate-hiking cycle has provided a sense of stability in equity markets, even as inflation remains above the target level. This approach is consistent with an expansionary fiscal policy that is driving up treasury yields. With consumer spending on the decline, increased government borrowing might help mitigate some adverse effects on the US economy. However, the persistence of high interest rates could potentially lead to an overreaction in the markets.

At the same time, rising tensions in West Asia may impact energy prices and jeopardize the Fed’s efforts to stabilize inflation. While the Fed’s cautious stance could slow capital inflows into safe-haven US assets, it is unlikely to completely reverse this trend. Emerging markets are expected to face ongoing challenges related to limited capital flows, although currency volatility is likely to decrease.

Global central banks will need to navigate the rising US treasury yields, which may accelerate the trend of de-dollarization in foreign exchange markets. The US’s continued fiscal expansion could also boost export demand in emerging economies.

India appears to be somewhat shielded from these global economic shifts thanks to robust domestic consumption, government-led investments, a growing interest in equity investments, strong services exports, and record levels of household savings. If Jerome Powell can navigate inflation without triggering a recession in the US, it could positively affect Indian equity markets as they stabilize domestically. This improvement may occur despite short-term fluctuations, necessary adjustments, and fears of a potential recession.