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

The US Fed's monetary policy outcome is slated to be out on December 18.

The US Federal Reserve's monetary policy outcome, due December 18, is likely to be one of the biggest market-moving events before the year comes to an end. The American central bank is widely expected to stay on course to deliver another quarter-sized rate cut despite the recent uptick in inflation. More than the rate decision, it will be the Fed's insights on policy easing that will keep markets on the edge this time.

According to the CME FedWatch Tool, 97.1 percent of investors are betting on the possibility of a 25 basis points (bps) rate cut from the US Fed as of December 16, higher than the 96 percent possibility seen a day ago. On the flipside, the odds of no change in Fed policy were less than 3 percent.

Much like the consensus on the Street, Aishvarya Dadheech, founder and CIO at Fident Asset Management, also expects the Fed to deliver a 25 bps rate cut on December 18, a move which he thinks will be healthy for the equity markets, including those in emerging markets.

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In an unexpected scenario, if the Fed doesn't deliver a rate cut, Dadheech anticipates profit-taking in the US market, which will possibly have an overarching impact on Indian equities as well. "Other than that, I don't think there are any major areas to worry about, at least for this month, apart from geopolitics, if anything comes up," he added.

Along with its rate decision, the Fed will release updated economic forecasts, including projections for the number of interest rate cuts expected in the coming year. These projections hold greater significance as the Fed will have to deal with the implications of Donald Trump's promise of expansionary policies as he takes office as US President in 2025. This may require changes in the Fed's previously planned monetary easing trajectory as Trump's policies may put pressure on the US' fiscal standing.

In September, members of the Fed's rate-setting Federal Open Market Committee (FOMC) anticipated an average of four additional quarter-point rate cuts in 2025, predicting that the bank’s benchmark lending rate would decrease to between 3.25 and 3.5 percent. While projections of more rate cuts than those anticipated in September this year seem unlikely, it leaves room for two scenarios to pan out. The Fed could either keep its forecasts unchanged or hint at relatively fewer rate cuts in calendar year 2025.

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.

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