Bulls all charged up as Fed signals rate cuts earlier than expected

The job market is expected to remain strong in the near future as most employers appear reluctant to let go of staff because of labour shortage, and strong corporate earnings continue to drive equities higher.

The US Federal Reserve on Wednesday left benchmark rates unchanged, but more importantly indicated that the tightening of monetary policy was likely over. Fed chair Jerome Powell also hinted at rate cuts in 2024, something which the market had not been expecting. Market observers are pencilling in as much as three rate cuts in 2024.

The Fed’s dovish remarks send the Dow Jones Industrial Average past the 37,000 mark for the first time.

So far, the Fed had been maintaining that rates could remain higher for longer because it was not convinced that inflation was fully under control.

Also Read: Fed prepares to shift to rate cuts in 2024 as inflation eases

The latest remarks in a sense signal the central bank’s victory over inflation, which has been a major pain point for bond and equity investors alike over the last couple of years.

"For an institution historically hesitant to declare victory over inflation, the updated projections and revised statement signal a remarkable transformation in both tone and perspective," Dhawal Ghanshyam Dhanani, Fund Manager, SAMCO Mutual Fund said.

The sustained rally in equities and the strength in the labour market had been making the Fed’s task tough, as both factors are major contributors to inflation because they stoke consumption.

The job market is expected to remain strong in the near future as most employers appear reluctant to let go of staff because of labour shortage, and strong corporate earnings continue to drive equities higher.

Also Read: Emerging markets, commodities should be underweighted in global portfolios: Ed Yardeni

The Fed’s decision to take a dovish view signals that the central bank is confident that inflation will be in check even as the economy continues to chug higher.

"Market pricing for near-term cuts has moved up materially post FOMC, with markets frontloading rate cuts into early 2024. We do not necessarily agree with the current aggressive pricing. However, if “totality” of data continues to cool and support their narrative, we think the Fed could fairly soon start laying the groundwork for normalisation to begin early 2H24," Madhavi Arora, lead - economist, Emkay Global Financial Services said.

With Dow Jones rallying and GIFT Nifty indicating a gap up start, analysts believe that the Nifty 50 may rise to 21,150-21,250.