Investors cautious as global markets turn jittery ahead of FOMC meet

The US central bank is broadly expected to proceed with another quarter-point rate cut, despite the recent rise in inflation.

Investors took on a cautious footing in the domestic market as jitters spread across global markets in the run up to the US Federal Reserve's monetary policy outcome, slated to be out on December 18.

Accordingly, risk aversion was seen in the Indian market throughout the session on December 16, dragging the two benchmarks--the Sensex and the Nifty 50 to end with marginal losses. The sentiment in the domestic market reverberated the subdued cues from most global markets.

At close, the Sensex was down 384 points or 0.5 percent at 81,748, and the Nifty was down 100 points or 0.4 percent at 24,668. About 2,221 shares advanced, 1,749 shares declined, and 94 shares remained unchanged. The fear gauge 'India VIX', also spiked over 10 percent intraday but later moderated, to end 7 percent higher.

While the US's Dow Jones Industrial Average extended its losing streak to the seventh straight session overnight, Japan's Nikkei 225, Hong Kong's Hang Seng, China's CSI 300, and South Korea's Kospi closed trade on December 16 with losses ranging from 0.03-0.9 percent. Similar jitters were felt across European markets as well, with UK's FTSE 100, France's CAC 40 and Germany's DAX opening the session on December 16 on a weak note.

The jitters that were felt across global markets stemmed from uncertainty hanging around the Fed's forecasts, which will provide investors with insights into its policy easing trajectory for 2025. While the CME FedWatch Tool suggests a sure shot case of another 25 basis points rate cut, with 97.1 percent of investors are betting on this possibility, it is the Fed's future course of action that remains a point of concern.

Also Read | Sensex, Nifty end lower on a dull day of trading; IT and metals drag, real estate defies trends ahead of Fed meeting

In September, the Federal Open Market Committee (FOMC) projected an average of four additional quarter-point rate cuts for 2025, expecting the benchmark lending rate to drop to between 3.25 and 3.5 percent. While the likelihood of more rate cuts than initially anticipated seems slim, two possible scenarios remain: the Fed may either maintain its current forecasts or signal a reduced number of rate cuts for 2025.

Also Read | US Fed expected to deliver quarter-sized December rate cut; all eyes on future policy trajectory

If the Fed's new forecasts show no change in expectations, it will likely be positive for the markets. However, any downward revision in predictions could have a negative impact.

Meanwhile, this Fed policy meeting holds greater significance than previous ones as it marks the last under the Biden administration. This suggests that the Fed's revised forecasts for 2025 could also account for potential shifts in policy direction with the return of Donald Trump as US President.

The course of the Fed's action will be closely related to the shift in policies under the upcoming Trump administration that is expected to take on tariffs and industrial policies, vouching for an America-first approach.

This leaves room for greater uncertainty on the implications of not just policy changes under Trump but also the consequent shift in the Fed's monetary policy path for other developed as well as emerging markets, which has left investors in a pickle.

Also Read | Fed rate cut almost a certainty this week, but next year is a different story

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.