The US Federal Reserve's decision to halt its rate-escalation cycle has brought some calm to equity markets, despite inflation exceeding the target. This move aligns with an expansionary fiscal stance that is pushing up treasury yields. As consumer spending continues to shrink, government borrowing could soften the impact on the US economy. However, higher US interest rates may linger, potentially triggering a market overreaction.
Simultaneously, escalating conflicts in West Asia could influence energy prices and put the Fed's steady inflation stabilization efforts at risk. The Fed's cautious approach is expected to slow down the flow of capital into safe-haven US debt, but not reverse it. Emerging markets will continue to struggle with limited capital flows, though currency instability should diminish.
Central banks across the globe will have to deal with rising US treasury yields, which could speed up forex de-dollarization. The ongoing fiscal expansion in the US could stimulate export demand in emerging economies.
India seems to be somewhat insulated from these global economic shifts due to strong domestic consumption, government-led investment, a budding 'cult of equity', robust services exports, and unprecedented household savings. If Jerome Powell can manage inflation without triggering a US recession, it could have a positive impact on Indian equity markets as they recover domestically. This could happen despite short-term volatility, time correction, and potential recession aversion.
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