Moneycontrol Pro Panorama | US Fed cuts rates, but foggy road ahead

US Fed opens policy meeting, set to keep rates unchanged

Dear Reader,

US Federal Reserve’s rate cut of 25 basis points (bps) to between 3.75 percent and 4 percent was on expected lines. Along with the earlier 25 bps cut in September, it lowers borrowing costs in the US to its lowest level since late 2022. Yet, it failed to cheer equity markets globally. US equities ended on a sombre note and investors in the rest of the world woke up jittery for want of a clear trajectory ahead.

What set investor sentiment oscillating between caution and optimism is US Fed chair Jerome Powell’s statement that the expectation of a December rate cut (forecast of 25 bps) is “not to be seen as a foregone conclusion — in fact far from it.”

Powell’s remarks at the press conference conveyed that the uncertainty on two key driving factors of central bank policies - inflation and employment - hasn’t gone away yet.

On the one hand, the initial jobless claims have remained stable. On the other hand, the job creation and job finding rates are low, which can tell on employment levels over time. Add to this are announcements of layoffs in big numbers from giants such as Amazon, UPS and Target, in order to improve cost efficiency aided by artificial intelligence. Economists point out that while there is lower immigration due to policy changes and lower labour force participation, demand for labour is softer, too.

On inflation, there seems to be comfort that personal consumption expenditures (excluding tariffs) inflation is cascading close to the targeted 2 percent. However, concerns on services inflation persist and it is too early to assume anything about tariff-led inflation.

Besides, there is lack of clear data from the government after its shutdown and the Fed has had to steer its strategy on a foggy road. It certainly isn’t a world in which one should bet all-in on a December rate cut, or for that matter, on multiple cuts next year, points out Robert Armstrong, in this FT column ‘Jay thinks rates don’t have far to fall’.

Besides, there are two other structural factors at play -- trade war and the deluge of AI capex investments -- which make the job of any central bank onerous, says Anubhav Sahu from MCPro Research. True, the US has made some headway in deals signed with some countries, but the big ones such as India and China are still a work in progress. As for the impact of AI, there is uncertainty on returns that can be expected from trillions of dollars being pumped into this sector. Any trouble that brews in these two areas could impact the economic outlook of the US and cause ripples across other regions too.

The prolonged sideways movement seen in most equity markets across the world, therefore, is not surprising. While corporate results, earnings momentum and sector-specific policies can trigger near-term movements in select stock prices, the impact of larger policy decisions from central banks or the government cannot be brushed aside.

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