The Fed Will Retain Its Dovish Stance ::HDFC Securities

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The Federal Open Market Committee (FOMC) the policy making arm of the U.S. Federal Reserve would complete its two day meeting today in the Unites States.

The emerging markets, which are going through turmoil, are looking at the U.S. Fed with fond hopes that the Central Bank will keep its stance dovish. A hawkish stance of the U.S. Fed could spell fresh trouble for the emerging markets, of which India is an integral part.

The FOMC at its last October meeting had wound up its bond buying programme and had said that it would hold interest rates low for a ?considerable period? of time.  

The operating words are ?considerable period?. If the FOMC retains these words in its statement, the emerging markets should heave a sigh of relief. If they don?t, the markets will weaken further.

The most important fundamental change that has happened between the two fed meetings is the sharp slide in Crude Oil prices. Nymex Crude oil has fallen more than 33% between the two meetings.

The resultant reduction in Gasoline prices has triggered a sharp rise in Consumer confidence. The Fed officials have also taken note of this and have been arguing that this has put more dollars in the consumers wallet. There is no denying the fact.

But the Fed officials have ignored the impact low crude prices may have on employment and financial stability of the shale gas industry. Shale gas is the sector that has created  bulk of the jobs in the past three years. If crude prices sustain at these levels for long or fall further, the jobs could diminish and banks could end up with large NPAs. 

The first casualty of the falling crude has been the Russian currency and the other emerging markets currencies. 
If the Fed were to change its stance now to hawkish, it would further roil the global currencies and set a cat amongst the emerging market pigeons.This  in turn could adversely impact world trade and ultimately the U.S.

For all of 2013-14 the Fed was worried that inflaton was nowhere near the Fed target of 2%. Only at the last meeting it had said that the likelihood of inflation running ?persistently? below the Fed?s 2% annual target had diminished. But the strengthening of the  dollar and weaker crude prices should make low inflation a concern again. 

This  should prevent the Fed from turning hawkish. Lower inflation may be a risk and the Fed may say so in so many words in its statement.
The Fed will release its policy statement at 2Pm EST, Half an hour after that the Fed President, Janet Allen, will hold  a press conference. This cross questioning from the press will help investors better understand the policy and obviate any mis-interpretation.

The Fed is unlikely to rock the boat at this juncture considering the turmoil in the emerging markets. Lower crude prices is still a developing story and the Fed would not like to pre-judge its endgame.