Trump's policies, tariffs, and Fed's rate cuts: Marcellus' Arindam Mandal decodes the path ahead

Arindam Mandal, Head of Global Equities at Marcellus Investment Managers

With the Fed’s 25-basis point rate cut widely anticipated, Arindam Mandal, Head of Global Equities at Marcellus Investment Managers is more focused on what lies ahead in 2025, particularly as Trump's proposed tariffs could trigger inflationary pressures in the US, reminiscent of the scene in 2018. He highlighted the surprising resilience of the US economy, supported by positive real wage growth and steady unemployment, how it may put the Fed on a caution footing when it comes to rate cuts next year.

In an exclusive interview with Moneycontrol, Mandal also pointed towards the strengthening US dollar, driven by higher inflation expectations and its status as a safe-haven currency, while cautioning against overreacting to rupee depreciation, which he sees as largely in line with historical trends. For Indian equities, he ranks the importance of robust domestic earnings over prevailing global risks.

Here are the edited excerpts from the interview:

What will you be focusing on in the Fed's outcome or its forecasts, and the pressures that might arise afterward? What are the key things you’re looking for?

I think the expected rate cut is around 25 basis points, which seems widely anticipated. Honestly, I’m not expecting any major surprises—these decisions usually follow consensus, and the Fed rarely deviates significantly on short notice.

The critical focus, though, is what happens next year. People are trying to predict the trajectory of monetary policy in 2025, especially with the proposed tariffs from Trump. For instance, in 2018, after similar tariff announcements, inflation rose by 70–80 basis points over the following 12 months. So, I’ll be watching inflation data closely to see how it tracks if these tariffs are implemented.

Right now, there’s speculation about how tariffs might be introduced—whether phased in over the year or all at once—but nothing is certain. That uncertainty makes inflation a key metric to watch.

Do you think the tariff situation will impact the Fed’s forecast for 2025? Could the Fed adopt a more cautious stance, given the uncertainty surrounding these policy changes? Might they slow down the rate cuts forecasted in September?

The economy is surprisingly resilient, which has been a positive development. Real wage growth—wages adjusted for inflation—has been in positive territory for the past three to four quarters, and unemployment remains steady at around 4%. If this strength holds, even with some inflationary pressures from tariffs, the Fed may slow the pace of rate cuts.

There’s no urgency to stimulate an already stable economy, as doing so could risk reigniting inflation. However, if the economy slows, the Fed may consider accelerating rate cuts. So, as long as job numbers hold and inflation doesn’t surge uncontrollably, the Fed might proceed cautiously with its cuts, even if tariffs are imposed. This would reflect their need to balance inflation risks against economic strength.

So, basically, you are betting on the idea that there might be a downward revision in the Fed’s previously forecasted rate cuts?

Yes, exactly.

Does that mean you expect either four or fewer Fed rate cuts in 2025?

Yes. I think if you go back a couple of quarters, people were anticipating a 200 basis point cut next year. Those expectations have likely come down. Now, I think the market is pricing in fewer than four rate cuts, maybe two rate cuts, which is what a lot of the consensus is saying on the Street.

Given that the Fed’s policy easing path is likely to slowdown in 2025, how do you think this will affect India’s rate trajectory?

There are two aspects to this: short-term and long-term. In the short term, if I look at it, going back to what happened in 2017-18, the dollar actually strengthened against most other currencies. After that initial shock, things tend to stabilise within a year or two, so that might happen this time as well.

One thing we have to consider is how well the Indian economy holds up. For example, last quarter, earnings numbers were bad. The same slowdown in consumption could be accentuated if India tries to stimulate demand and begins cutting rates, so it is unlikely to happen soon.

The dollar index is currently hovering around the 85 mark. With Trump’s return and his pro-America policies, do you think this uptrend in the US dollar will continue in the near term?

In the near term, yes. Unless there are major economic challenges, the dollar’s dominance is unlikely to end. The spike in the dollar is primarily due to the expectations of US inflation staying higher than expected. If inflation is higher, the dollar remains stronger because it’s the safest currency that offers higher returns.

Sure, Trump’s policies may have an impact, but I don’t think this would have changed too much if someone else had been in power. Honestly, we have not seen growth in many regions globally as well. Europe, for example, has seen practically no growth. Unless other economies show signs of significant growth, the dollar is likely to continue its dominance.

The rupee is already hitting all-time lows almost every day. Do you see this as a big risk to Indian equities, given that we are already struggling with valuation concerns?

Broadly, India tends to see a 2-4% depreciation in the currency every year, and this is in line with expectations due to inflation differences and interest rates. The recent 4-5% depreciation is not surprising. So, I don’t think the market is too concerned about what’s happening in the US unless we continue to see a weakening in earnings. That would be a bigger risk than what is happening internationally. The domestic economy has to stay strong, and that is the key concern, rather than global factors.

What is your outlook for the markets in the coming weeks? What do you anticipate the trend to be like?

If I look at the last few years, the final quarter typically performs well for equities. People are generally optimistic about the next year, so there is usually a positive sentiment. This time, however, it is a bit different. The optimism has already been built in, and you are probably looking at a bit of a slowdown. This is how it differs from previous years.

In fact, in the last two years, after a long hiatus, we saw earnings upgrades, whereas historically, we have seen earnings downgrades.