The US Federal Reserve’s Federal Open Market Committee (FOMC) held its benchmark interest rate steady at 3.50-3.75% late on Wednesday, in what was new Fed Chair Kevin Warsh’s first policy meeting and press conference at the helm of the central bank.
While the rate remained unchanged for a fourth consecutive meeting, the underlying data and changes announced by Warsh struck a more hawkish note, signalling the possibility of rate hikes later this year.
Warsh announced a series of changes, including an end to forward guidance on economic metrics such as inflation and growth. Calling the policy statement “a bit shorter, a bit simpler”, he said providing forward guidance was “not well-suited to the current policy conjuncture”. The policy statement also omitted how each member of the committee voted on the interest rate action.
A hawkish stance
The central bank’s latest Summary of Economic Projections (SEP) signaled a more hawkish stance compared to the March meeting. Based on the responses of 18 of the 19 officials, excluding Warsh who didn’t vote, the median estimate for the Fed funds rate by the end of 2026 rose to 3.8% from 3.4% in March, signaling that the committee sees at least one rate hike this year.
Nine officials forecast at least one rate hike this year, including six who expected multiple hikes. In contrast, the majority of the policymakers had expected at least one rate cut in 2026 in the March SEP, which reduced to only 1 policymaker in the latest document.
This comes at a time when the country has seen a strong set of growth and labor data, while inflation has been a consistent pain point, first due to the reciprocal tariffs announced by President Donald Trump last year and now due to the ongoing war in West Asia, which has driven up fuel prices and disrupted supply chains globally.
Data from the US Bureau of Labor Statistics released last week showed that retail inflation accelerated to 4.2% in May, crossing the 4% level for the first time in 3 years, and much above the Fed’s 2% upper band for its inflation target. Meanwhile, non-farm payrolls in the country increased for the third straight month in May, while the unemployment rate remained steady, signaling a robust economy and further cementing expectations of a rate hike by the central bank.
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The latest Fed policy led to yields of short-term US treasuries rising to a 16-month high on Wednesday, with the US rate markets putting 72% odds on a rate hike by the central bank by October, according to a Reuters report. Yields, which move inversely to bond prices, rise on expectations of higher interest rates to reflect higher borrowing costs for the government.
Effect on Indian market
Higher interest rates in the US can potentially lead to foreign outflows from the Indian capital market as higher yields across US treasuries offer attractive returns for foreign investors. Higher bond yields in the US also reduce the attractiveness of Indian bonds for foreign investors.
This is at a time when the Indian market has already been crippled by persistent foreign outflows due to headwinds such as high crude oil prices, an uncertain geopolitical environment, a weaker rupee squeezing the returns of foreign investors, and the underperformance of the Indian stock market due to a lack of AI-related opportunities. Foreign institutional investors have pulled out $26.7 billion from the capital markets so far in 2026, already eclipsing the $11.84 billion they had pulled out in the entire 2025.
This time around, foreign inflows remain largely dependent on whether a peace deal between the US and Iran will be signed and followed through. Exorbitant fuel prices have crippled the Indian stock market since the start of the war, with crude oil rising as high as $125 a barrel at its peak. Both countries are scheduled to sign a peace deal on Friday.
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The rupee had slipped against the dollar at the open on Thursday after the Fed’s policy decision but recovered to end higher for the 5th straight session. The benchmark Nifty 50 and Sensex also recovered from intraday lows to end 0.3% higher.
The Reserve Bank of India’s recent measures to attract foreign capital also remain a positive for the market. “For markets, a more hawkish Fed could temper risk-on sentiment from a potential U.S.–Iran deal. Still, Indian markets are responding positively to deal prospects, which have led to a sharp drop in crude oil prices, further aided by recent RBI measures to attract foreign flows, including easing of FPI norms. Together, these factors remain supportive for the INR, FPI flows, and the domestic bond market, keeping overall sentiments constructive,” according to Amit Modani, lead of fixed income at Shriram Asset Management Company.
“Equity markets will likely focus on earnings, with bond and currency markets awaiting further clarity on inflation. The policy was a non-event for EMs right now, but a tightening Fed would likely force EM central banks to also follow,” said Ankita Pathak, head of global investments at Ionic Assets.
