At the upcoming Jackson Hole Economic Symposium, all eyes will be on US Fed Chair Jerome Powell, who is widely expected to hint at a potential rate cut in September. According to experts, given the recent economic indicators, there’s a strong possibility that Powell might signal a 25 bps or even a 50 bps rate cut next month.
The Federal Reserve's Jackson Hole Economic Symposium is an annual conference hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming, United States. It brings together central bank leaders from around the world. This year, it will be held from August 22 to 24.
This year’s symposium theme is “Reassessing the Effectiveness and Transmission of Monetary Policy.”
While many anticipate clear signals from the Fed Chair, experts emphasise that Powell has repeatedly stated the US central bank will stay data-dependent. Even so, a 25 bps rate cut in September seems increasingly likely.
A rate cut by the Fed would significantly impact the global financial markets, including India.
We consulted several experts to gather their expectations for the US Fed’s September decision and its potential impact on the Indian stock market. Here's what they said:
Arora observed that the market expectation is that Fed Chair Powell will pave the way for a September rate cut while speaking at Jackson Hole on Friday.
However, Powell had emphasised that the Fed will be 'data dependent, not data-point dependent' in the July FOMC press conference, and recent economic data has clashed - the unemployment rate rose to 4.3 per cent in July, while retail sales and jobless claims data paint a much healthier picture.
In this context, Arora added that Powell will likely hedge his bets and reiterate that the Fed remains watchful, especially regarding how the labour market evolves.
Arora said markets are currently pricing in a 78 per cent probability of a 25bps rate cut in September, compared to a 53 per cent probability of a 50bps cut just a week ago.
Given the current dynamics, a 25bps cut looks more appropriate.
Indian markets have already heavily factored in rate cuts, with the rate-sensitive IT sector seeing significant gains over the past week.
Nevertheless, a September rate cut will be sentimentally favourable, and domestically, the RBI may follow suit before the end of 2024, said Arora.
Shah underscored that the Indian interest rate cycles generally align with US trends, though US rate hikes have been far more aggressive than India in the recent past.
Anticipation of US rate cuts often benefits technology stock valuations, positively impacting Indian IT services.
Rate-sensitive sectors like real estate and home financing may also perform well.
However, market performance is influenced by more than just interest rates.
For example, despite multiple rate hikes between 2004 and 2006, Indian markets saw strong returns, while rate cuts in 2018-2020 (pre-COVID) led to a subdued performance.
Future market trends will be shaped by India's relative attractiveness from the valuation and growth standpoint and strong corporate balance sheets apart from interest rate cycles alone, said Shah.
Wadhwa believes that the Fed's dovish stance could increase foreign portfolio inflows into the Indian stock market as investors seek higher returns in emerging markets.
According to Wadhwa, this could provide a strong tailwind for Indian equities, particularly in sectors like IT and pharmaceuticals, with significant exposure to the US market. However, the extent of the impact will depend on the exact magnitude of the rate cut and Powell's accompanying commentary on future policy direction.
Given the current economic landscape, Wadhwa said it’s almost certain that Jerome Powell will hint at a rate cut during his address at Jackson Hole.
The key question is whether we’re looking at a 25 bps or a more aggressive 50 bps cut in September.
A rate cut could act as a catalyst for Indian markets, especially in attracting foreign investments.
Moreover, if the Fed takes a dovish stance, it’s likely that other central banks, including the RBI, may follow suit to remain competitive and supportive of their economies.
However, investors should brace for volatility as the global markets digest the Fed’s policy signals, said Wadhwa.
Chowdhury expects Fed officials, including Jerome Powell, to provide clear hints on the future interest rate trajectory as inflation and labour market data show sustained signs of cooling.
At the September Fed monetary policy meeting, Chowdhury anticipates a 25-bps rate cut as the US central bank gears up to avoid a hard landing for the US economy.
He expects the interest rate cut to be positive for Indian equities, but markets will likely build up euphoria long before the actual event.
Chowdhury said the realty and IT sectors look poised to benefit from lower interest rates in the medium to long term.
Goel believes Fed Chair Powell will gravitate towards being cautious while indicating the Fed's plans for September and the subsequent months.
Powell will indicate that the balance of risks has shifted in favour of rate cuts but will refrain from suggesting that the September rate cut is a done deal, considering many US economic data points that will be announced between now and the Fed meeting in September, Goel said.
Goel believes that the Fed will eventually implement a 25 bps cut in September.
A 50 bps cut would convey an alarmist message about the health of the US economy, which the Fed would want to avoid.
Goel also believes that the markets have already discounted a 25 bps cut in September and that it will not affect India or other emerging markets.
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