All eyes on US Fed decision — 75 bps priced in but will there be a downshift

The US Federal Reserve is widely expected to announce a 75 basis point hike in the benchmark interest rates in its battle against red-hot inflation around midnight on Wednesday, November 2.

While the market has priced in a 75 bps hike, experts feel it is best to wait and see what the Fed does rather than jump ahead of time. It could go for a 50 bps hike, too, but a 75 bps hike is what the markets are expecting. But what after the November meeting? Will there be a potential downshift in December, and how much is priced?

The S&P, for example, is up 10 percent in the last 13 trading sessions. It has done a fair bit, real yields are down in the US, and the dollar has come off quite a bit. VIX has been falling for many sessions in a row. So, the financial conditions of the US have eased a bit.

One view is that, as we heard at the Jackson Hole Summit or the September policy, the Fed will want to err on the hawkish side. Why should they sort of let their foot off the pedal now? Why not wait to see that inflation actually is coming off?

Ken Peng, Asia Pacific Investment Strategist at Citi Private Bank, told CNBC-TV18 there was no real reason for the Fed to turn soft today because employment is still rising, inflation is tapering off but is still at around 8 percent, and so, the inflation bit is still going to be the higher priority for Fed.

"If the Fed statement is similar to September's, that will be considered hawkish because 75 bps is already in the price. So, we are basically comparing the Fed statements — tonight versus September,” Peng said.

Wall Street stocks fell on Tuesday ahead of the expected announcement of 75 bps hike in interest rates on Wednesday after its two-day meeting. Asian markets were trading mixed in early trade on Wednesday.

Given the fact that the market has rallied and the proclivity of the Fed has been to err on the hawkish side, the risk is skewed towards the hawkish side because of the rally and because of what the Fed has done in the past.

In India, Nifty momentum remains strong, and with data like the auto (October) numbers, Purchasing Managers' Index numbers, and high-frequency data still indicates that the economy is in good shape.

There is an RBI meeting on November 3. This is not a meeting, as has been widely discussed, about rates or having a rate decision. And experts have said the timing of the Monetary Policy Committee's meeting the night after the outcome of FOMC deliberations is coincidental.

But it will be interesting to see what RBI has to say about inflation and whether additional measures are needed.

Watch the accompanying video of CNBC-TV18’s Prashant Nair for more details.