Expect US Fed to hike rates by 50 bps over 2019: ICICI Research

Markets viewed the Fed's underlying tone as dovish, but US and global stocks were hit because investors expected a more dovish tone.

The US Fed on December 19 hiked interest rates for the fourth time this year by 25 basis points, projecting only two more rate hikes next year.

"Although the Federal Reserve delivered a dovish rate hike as was being priced in by the markets, the tone particularly in the press conference stoked concerns about medium-term growth prospects both in the US economy and in the global economy," ICICI Research noted.

ICICI Research said it expects the US Federal Reserve to hike rates by 50 bps over 2019, saying the Fed could deliver a series of two dovish rate hikes next year.

"Given that labour markets are still robust and GDP growth is forecast to be above trend level in 2019 at aggregate, we continue to expect 50 bps worth of rate hikes over 2019 with the Fed likely to end its rate hiking cycle," ICICI Research said in its note.

The Fed, led by Jerome Powell, also indicated that future action on rates would be data dependent, saying that it will gradually withdraw support from a strong economy.

But the Fed also said it will "continue to monitor global economic and financial developments and assess their implications for the economic outlook."

The Fed did not offer much clarity on the neutral rate of 2.8 percent, which is the rate at which GDP grows if inflation is stable.

After the announcement by the Fed, the dollar recovered against major currencies, with the DXY ending the day slightly higher.

ICICI Research said it is still bearish on the US dollar, but does not rule out potential upside.

"While we would not rule out further possible upside, we reiterate our bearish USD call over the medium-term given that we expect the growth divergence between the US and non-US world to shrink," ICICI Research said.

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Source: Moneycontrol