 "US Fed rate cut: How leading brokerages interpret the development")
The US Federal Reserve (US Fed) has cut the target range for the federal funds rate by 50 basis points (bps), from 5.25 - 5.5 per cent earlier to 4.75 - 5.00 per cent on Wednesday, the first time since 2020. The cut comes amid concerns regarding the job market in the US, and ahead of the US presidential elections in November 2024.
Policymakers, according to reports, expect the Fed's benchmark to fall another half of a percentage point by 2024-end, and another one per cent in 2025.
After this move, analysts expect the US central bank to now go slow on its rate cutting trajectory, remain data dependent, and also watch the outcome of the US presidential polls on November 5.
The large cut of 50 bps on Wednesday, they believe, seemed counterintuitive to the repeated claim that the economy was strong. The recalibration argument is clashing with the message this large cut sends.
Asian markets, meanwhile, reacted positively to the cut in interest rate by the US Fed with Nikkei 225, Hang Seng and the Shanghai Composite rising up to 2.5 per cent in trade on Thursday.
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Here's how leading brokerages have interpreted Fed's move.
Rabobank International
A 50 bps cut without compelling data or forecasts, the Fed is taunting former and possibly next President Trump. This could have serious repercussions next year. The sole dissenter, Michelle Bowman, may just have improved her chance of becoming the next Fed Chair.
Looking ahead, if this was truly a recalibration and 50 has not become the new 25, we still expect 25 bps at each of the three upcoming scheduled meetings in November, December and January.
What happens after January will to a large extent depend on the economic policies of the next administration. A Trump victory would likely lead to a universal tariff and a rebound in inflation that should stop the Fed’s cutting cycle in its tracks. A Harris victory would likely be less inflationary and give scope for additional rate cuts in 2025.
Nomura
The meeting statement was also less dovish than we had expected. Forward guidance language indicated only a slight easing bias, referring to the considerations for “additional adjustments” to rates. We had expected the statement to suggest the committee anticipated additional rate cuts would be appropriate.
We continue to expect 25bp cuts in November and December. The latest decision raises risks of a more dovish path. Actions speak louder than words; despite messaging that today was a one-off move, the Fed has signaled a high sensitivity to labor-market weakness.
Nilesh Shah, MD, Kotak Mahindra AMC
The US Fed opened the rate cut cycle with a bang with 50 bps cut in line with changed market expectations. From Inflation is transitory to higher rates for longer, fed has come a long way to meet market expectations. This rate cut will facilitate flows to the emerging market assets with weaker dollar and lower rates.
Dhiraj Relli, MD & CEO at HDFC Securities
US consumers would welcome a large interest-rate cut but the odds of igniting consumer price and/or asset inflation go up. If stock prices resume soaring, it has the potential of inflating a market bubble.
US equities will climb through the rest of the year with the Federal Reserve’s aggressive interest-rate cut bolstering the chances of a soft landing for the economy, according to a survey of Bloomberg Terminal subscribers.
The actions of the Federal Reserve Board they’re not just limited to the US. They have an implication, a spillover effect in other parts of the world. Fed decisions can also impact foreign exchange markets given their effect on the value of US. dollar, the global reserve currency with impact on trade and debt and interest payments.
Geojit Financial Services
The big Fed rate cut by 50 bps has the potential to take equity markets into a consolidation phase with an upward bias. More rate cuts are expected from the Fed, going forward. The rate projections are 4.4 per cent by end 2024 and 3.4 per cent for end 2025. These will be big declines from the present 4.75 to 5 per cent rate.
The rate cuts by the Fed will pave the way for rate cuts in India, too. CPI inflation coming below the RBI’s target of 4 per cent during the last two months will facilitate rate cuts. Two rate cuts of 25bp each are possible in India before March 2025. In brief the market scenario is turning favourable for rate-sensitives, particularly banking.
Raghvendra Nath, MD, Ladderup Wealth Management
The 50 bps cut is a positive surprise. It indicates the confidence of the Federal Reserve on its policy outcomes over the last two years, as they stood steadfast on their resolve to bring down inflation. The market seems to be building another 50bps rate cut in 2024 and a few further cuts in 2025. The US central bank is not going to rush into reducing rates aggressively but act strictly based on data, as has been seen over the past two years.