Fed rate cut amid Trump victory raises new inflation, policy uncertainties

The Nasdaq Composite settled higher by 1.5 percent, while the S&P 500 closed 0.75 percent up on November 7.

The US Federal Reserve voted to slash its key lending rate by 25 basis points on November 7, following a larger cut of half a percentage point seen in September. The new federal funds rate is in the range of 4.5 percent to 4.75 percent. This is likely to be positive for the IT and pharma sectors, although the Indian markets likely priced in the development alrady.

While the Federal Reserve Chair Jerome Powell expressed optimism regarding the progress on battling inflation, he avoided sharing any further guidance as a result of economic uncertainties and volatility.

The rate cut also coincides with a significant political shift following Donald Trump’s recent election victory. In his election campaign, Trump shared that he would implement tax breaks, which could be pose as a downside risk to inflation, sending it surging as more money enters the system.

However, this move would be in divergence from the Federal Reserve's goal to bring inflation closer to the two percent mark.

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In a conversation with Moneycontrol, Kranthi Bathini, equity strategist at WealthMills Securities said that the Fed is cutting rates, which indicates that growth is slowing down. However, if the new administration decides to offer tax breaks, the process will take time, and there will be lag-effect for a few quarters. Therefore, he advised it is best to take a wait-and-watch approach.

The US Federal Reserve has delivered on its promises of two rate cuts this year, and had previously guided for four cuts in 2025. However, these will largely be data dependent. Therefore, if the Trump administration decides to enact any policy changes on the taxation front which will increase liquidity in the system, any move from the US Federal Reserve will be entirely data-dependent, added Gaurang Shah of Geojit Financial Services.

US bond yields have been hardening over the past few weeks, jumping from 3.6 percent to roughly 4.5 percent. "It seems that the market is anticipating slower rate cuts going ahead and maybe there are even chances of inflation rising. Although the Fed Chief is hopeful of taming inflation back to the two percent target soon, thus not warranting a restrictive policy," said Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities.

The US markets have been cheering the election-led developments. This, coupled with the cut in the benchmark lending rate, has caused Wall Street to rejoice. The Nasdaq Composite settled higher by 1.5 percent, while the S&P 500 closed 0.75 percent up on November 7.

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