Ending the weeks of intense speculation, the US Federal Reserve's Federal Open Market Committee (FOMC) has taken a decisive step in initiating a new monetary easing cycle, announcing a 50 basis points (bps) cut to the federal funds rate. The move comes after months of market speculation and a 14-month policy pause. The current federal funds rate stands between 4.75 and 5.00 per cent, marking the first cut since March 2020. While the decision was welcomed, it also raised questions about future rate actions.
Fed Chair Jerome Powell advised the markets not to take this 50bps cut as a “new pace.” He stressed that the central bank would proceed cautiously, making decisions on a "meeting-by-meeting" basis, and urged markets not to view the 50bps cut as the beginning of a new easing trend. Powell reiterated the Fed's confidence in the economy: "The U.S. economy is in good shape. It is growing at a solid pace. Inflation is coming down.”
He emphasized that the central bank is not hurrying to ease policy, as he sees no likelihood of an elevated economic downturn. He mentioned, “There’s nothing in the SEP (Summary of Economic Projections) that suggests the committee is in a rush to get this done.”
Notably, the decision to cut rates was not unanimous. FOMC member Michelle Bowman dissented, favouring a 25 bps cut instead. This dissent underscored that the Fed does not see the need for a rapid or aggressive monetary shift at this stage. Powell also noted that the neutral rate may be higher than previously assumed, indicating that while the Fed is easing, it remains vigilant about inflation risks.
FOMC members have projected additional rate cuts of 25 bps in November and December, followed by a 100 bps reduction in 2025 and another 25 bps cut in 2026. This would bring the federal funds rate to a range of 2.75-3.00 per cent by the end of the easing cycle. Powell highlighted that the goal is to achieve price stability without causing a significant increase in unemployment.
The recent 50 basis points (bps) rate cut by the US Federal Reserve has sparked a range of expert opinions, each weighing in on its impact on the economy, markets, and future monetary policy direction. Most experts believe that the RBI will follow with one in its December policy after this rate cut.
Here’s a closer look at what various financial experts have to say about this significant decision:
Vijayakumar highlights the potential for the rate cut to push equity markets into a consolidation phase with an upward bias. He views Fed Chair Powell's optimistic remarks on inflation nearing 2 per cent and the solid state of US growth and the labour market as positive economic indicators. He anticipates more rate cuts ahead, with the Fed projecting a decline to 4.4 per cent by the end of 2024 and 3.4 per cent by 2025. This easing trend could pave the way for rate cuts in India, particularly since inflation has dipped below the Reserve Bank of India's (RBI) 4 per cent target in recent months. He believes the Indian market could see two rate cuts of 25 bps each before March 2025, making the environment favourable for rate-sensitive sectors, especially banking.
Ramaraju emphasizes that the US Fed's 50 bps rate cut, the first in four years, reflects the economic stress the US is undergoing, reminiscent of actions during the global financial crisis. He points out that while inflation and labour market conditions necessitated the aggressive move, it surprised many market participants. Ramaraju expects future rate cuts to be smaller and spread out, adding to market uncertainty. He predicts that broader emerging markets may also follow suit with rate cuts, while the RBI may opt for one in December or Q4 FY25. In the short term, foreign institutional investment (FII) outflows could occur, but once the US dollar eases, these flows may return to India.
Arora describes the 50 bps cut as a recalibration, with Powell aiming to safeguard the labour market from downside risks while acknowledging that this cut doesn't signal the pace of future rate reductions. The Fed’s outlook suggests a soft landing rather than a looming recession. She observes that this move provides some space for emerging markets to kick-start their own rate cuts, but given low global volatility, she expects the RBI to remain focused on domestic dynamics. Arora predicts shallow cuts by the Fed and the RBI, with India's first rate cut likely by December.
Dhanani views the Fed's 50 bps cut as a bold and unexpected move, marking a pivotal moment in the interest rate cycle after four years. However, he notes that the overall impact on markets will depend on other economic indicators like inflation and employment rates. He also points out that major economies, including the UK, Eurozone, and Canada, have already begun their rate-cut cycles, and history shows that India often follows the US in such pivots. He believes India is highly likely to follow the US in cutting rates.
Nath considers the 50 bps cut a positive surprise, reflecting the Fed's confidence in its policies over the past two years. With inflation nearly within the target range and labour market conditions still concerning, he believes the cut came at an opportune time. Looking ahead, he sees the Fed likely cutting rates further in 2024 and 2025 but stresses that the Fed will continue to base its decisions strictly on incoming data, maintaining a cautious approach.
Rego notes that the Fed’s rate cut ends the 14-month streak of elevated interest rates, marking a shift in monetary policy. He anticipates further rate cuts in the US over the next few years and highlights how lower rates could drive global investors to seek higher returns in emerging markets like India. This could boost foreign portfolio investments (FPI) and foreign direct investments (FDI) in India, appreciating the rupee against the US dollar, reducing import costs, and easing inflationary pressures. However, he also cautions that a stronger rupee could pose export challenges.
Dhiraj Relli, MD & CEO, HDFC Securities
Relli suggests that while US consumers may welcome the rate cut, there is a risk of triggering inflation in asset prices if stock markets resume their rally. He expects US equities to climb for the remainder of the year as the aggressive rate cut improves the chances of a soft economic landing. Additionally, Relli underscores the global implications of the Fed's decision, noting that it could influence foreign exchange markets and impact trade, debt, and interest payments globally. He also emphasizes that expectations regarding monetary policy changes could significantly affect market movements.
The 50 bps rate cut by the US Federal Reserve has been met with a mix of optimism and caution from experts. While many see it as a positive move for the economy and equity markets, there is also an acknowledgment of the risks and uncertainties that come with aggressive monetary easing. The impact on emerging markets, including India, will depend largely on how global investors respond to the shifting interest rate environment. As the Fed proceeds cautiously, with further cuts likely in 2024 and 2025, market participants will be closely monitoring incoming data to gauge the broader economic trajectory.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
