Mint Explainer: What the Fed’s ‘hawkish pause’ means for markets

livemint.com:

global slowdown have also increased and expectations of interest-rate cuts have been deferred, weighing on markets. US bond yields, already at a 16-year high, strengthened further after the FOMC decision on interest rates. The 10-year US bond yield stood at close to 4.4% while two-year bond yields shot up 8.6 basis points to 5.18%.

Expectations that interest rates will remain high for longer than previously expected makes emerging markets such as India less attractive foreign portfolio Investors and is thus likely to affect fund flows to such markets. Higher treasury yields are also strengthening the US dollar and this, too, is likely to result in reduced funds flows to emerging markets. Foreign portfolio Investors were net sellers to the tune of ₹3,983 crore in the Indian markets from 1 to 20 September, according to NSDL data.

This negative fund flow has put pressure on the markets. Even though domestic institutional investors continued to support the markets, providing some cushion, FPI inflows are also required for gains. Foreign fund flows remained positive from March to August, during which time the Sensex gained almost 10%.

Expectations that interest rates will remain high for a prolonged period are raising worries of a global economic slowdown. The Fed’s US GDP growth projections indicate a slowdown in the calendar year 2024. These growth projections now stand at 2.1% for 2023, and may soften to 1.5% in 2024 before recovering to 1.8% in 2025, according to the central bank.