The minutes of the US Fed’s January policy meeting, released on Wednesday, signalled that the US central bank can surprise markets in the coming months.
While the Fed has not explicitly said what it is going to do in the coming months, the market is expecting at least three rate cuts of 25 basis points each this year.
However, the Fed may have different plans.
The minutes of the Fed’s last policy meeting showed some members are in favour of raising rates in the near future if inflation risk rises, even though some among them see scope for further easing if inflation cools as anticipated.
The US Fed on January 28 held policy rates steady, after reducing rates in three consecutive policy meetings in September, October, and December last year.
The target range for the federal funds rate stands at 3.5% to 3.75%, which is its lowest level since 2022.
Will markets come under pressure due to a Fed surprise?
At their January meeting, Fed officials were careful about cutting interest rates. As the minutes showed, some said that if inflation remains high, they may even increase rates instead of reducing them. They believe the job market is improving, but they are still worried that inflation could stay high for longer.
Shrikant Chouhan, Head- Equity Research for Kotak Securities, believes US Fed rate hikes could create differences with President Donald Trump, who has been asking for lower interest rates. It may also make things tougher for Kevin Warsh, who has been nominated to lead the Fed after Jerome Powell’s term ends in May this year.
Chouhan said if interest rates in the US actually go up, it can negatively affect emerging markets like India.
“Higher US rates could push up the US 10-year bond yield, which may attract global money back to the US. This can also strengthen the dollar, putting pressure on emerging market currencies, including the rupee. As a result, our currency could weaken in the medium term,” Chouhan said.
However, Chouhan believes the chances of the US increasing rates are low.
“Instead of worrying too much about the Fed rate hike, we should focus on our own domestic economic fundamentals and the gradual improvement in corporate earnings, keeping a medium- to long-term investment view,” said Chouhan.
Abhishek Jain, Head of Research for Arihant Capital Markets, underscored the Fed’s deliberately cautious tone in which they are not forecasting hikes, but are clearly uncomfortable with how quickly markets moved to price in rate cuts.
Jain said US inflation has eased to around the mid-2% range, yet officials seem worried that financial conditions could loosen too fast if investors assume the tightening cycle is over.
“By keeping hikes as a live possibility, they’re effectively drawing a line – policy won’t ease unless the data truly justifies it. For markets, that means a firmer dollar, elevated bond yields, and a much narrower margin for disappointment in risk assets,” Jain said.
Manoranjan Sharma, Chief Economist at Infomerics Ratings, highlighted the divide among Fed members. He believes there will be no rate change in the near future.
“The Fed’s signal that further rate hikes remain possible underscores that inflation control is still its top priority. Keeping tightening on the table typically sparks short-term market volatility. Higher rates increase borrowing costs for businesses and consumers, pressuring equities, particularly growth stocks dependent on future earnings. Bond yields may climb, pushing existing bond prices lower,” Sharma said.
Currency markets often react more directly to rate decisions.
As per Sharma, if rates rise relative to other major economies, capital will flow into dollar-denominated assets, strengthening the U.S. dollar. A firmer dollar can weigh on multinational earnings and strain emerging markets carrying dollar-denominated debt.
However, markets usually price in expected policy moves.
Sharma underscored that if the Fed is reinforcing a “higher for longer” stance rather than surprising investors, adjustments may be orderly.
Ultimately, the impact will hinge on incoming inflation data, labour market strength, and global growth.
According to Sharma, some pressure is likely, but sustained stress depends on whether further tightening appears both credible and necessary.
The Fed’s preferred inflation gauge- the Personal Consumption Expenditure (PCE) data is due on Friday. Moreover, the advance GDP estimate for Q4 and the full year 2025 will also be released on the same day. Both will offer more cues on the US central bank’s interest rate trajectory.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
