US Fed signals rate cuts may start in September; is it time to change investment strategy? Here’s what top experts say

The start of the interest rate reduction cycle in the US may not be far, thanks to easing inflation. Addressing the press after the monetary policy meeting on Wednesday, July 31, Federal Reserve Chair Jerome Powell indicated that the first interest rate cut could occur as early as September. However, he added a caveat, stating that this would depend on data showing inflation moving sustainably towards the 2 per cent target.

For the past year, benchmark interest rates in the US have remained in the 5.25-5.50 per cent range. The Federal Reserve has maintained a firm stance on achieving its 2 per cent inflation target. While inflation remains a key focus, the Fed now considers risks to employment to be equally significant.

"If we were to see inflation moving down ... more or less in line with expectations, growth remains reasonably strong, and the labour market remains consistent with current conditions, then I think a rate cut could be on the table at the September meeting," Reuters quoted Powell saying so.

US Fed rate cuts could inject fresh momentum into the market, which is already at record highs but is struggling to maintain gains due to valuation concerns and the absence of new catalysts.

Mint consulted several experts to gain insights into how Fed rate cuts might impact various asset classes and to determine the strategies investors should adopt. Here's what they said:

V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services

The Fed's signalling of a possible rate cut in September is positive for equity markets globally.

US bond prices have risen, and the 10-year yield has fallen to 4.05 per cent, which is positive for capital flows to emerging markets like India.

The decline in the dollar index is positive for gold. Indian market is now outperforming other markets in terms of rise in market cap, which is mainly driven by the rise in the broader market.

The market's concern is about valuations.

The Nifty 50 is trading around 22 times FY25 earnings, which is not excessive given India’s long-term growth prospects.

However, the valuations in the broader market, driven by liquidity, are hard to justify.

Rahul Kalantri, VP of commodities at Mehta Equities

Interest rates and the equity and gold markets exhibit an inverse relationship.

A rate cut by the Federal Reserve boosts the equity and gold markets because lower interest rates result in cheaper business borrowing, facilitating easier expansion and reduced carrying costs.

This leads to increased profitability. Consequently, stock and commodities prices rise as investors perceive higher potential returns due to improved business prospects.

However, interest rates and bond prices are correlated; bond prices decline when interest rates are cut.

The anticipated rate cut in September has already been factored into today's market prices.

Therefore, investors and traders should now focus on the significantly escalating international geopolitical tensions.

We recommend that investors begin to book profits or implement strict stop-loss measures, as the upcoming weeks are expected to be highly volatile for global equity and commodities markets.

Amit Goel, Co-Founder & Chief Global Strategist, Pace 360

Fed Chair Jerome Powell sent a clear signal during his post-FOMC news conference that a September rate cut is on the table if data evolves as he expects and offers several dovish characterisations of the economy.

That signal is tempered by a notably less dovish policy statement containing only subtle hints of an impending rate cut.

It impacted the markets in a positive way, both for equities and gold.

We believe the financial markets have already discounted the prospective rate cut in September.

Hence, investors should take advantage of this policy by booking profits in equities.

They should buy long-term government bond funds as interest rates will fall significantly over the next 15 months.

They should also invest in gold on every dip.

Manish Chowdhury, Head of Research, StoxBox

We believe that the Fed’s dovishness is a major trigger.

We expect equities to outperform as some allocation (both existing and incremental) in debt instruments moves towards high-yield assets.

We anticipate bond yields will ease further as the case for multiple rate cuts becomes stronger in the future.

We advise investors to gradually increase their allocation towards equities with a medium—to long-term perspective.

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.