US Fed rate D-Day today: Will Powell go for a 25 or 50 bps cut – the first in 4 years; here's what markets say

The tone and reasoning behind the US Fed rate cut decision will set the stage for global market sentiment.

The US Federal Reserve is set to announce its monetary policy decision at 11:30 pm (India time) on September 18, with the market anticipating a 25-basis-point cut in the key interest rate – the first in the last four years. With a rate cut mostly factored in, the primary debate is whether it will be 25 bps or 50 bps.

The market also seems eager to hear US Fed chair Jerome Powell’s comments on inflation and employment for cues on the health of the economy and future rate cuts. Powell’s address will likely be the biggest policy event driving sentiment in domestic and global stock markets, which are looking for his guidance on the beginning of the easing cycle.

Experts believe this could be the start of a series of rate cuts. Powell, in his speech last month in Jackson Hole, Wyoming, stressed the Fed's readiness to cut rates to support the job market and achieve the challenging "soft landing" for the US economy.

The tone and reasoning behind the decision will set the stage for global market sentiment. Analysts say that while the markets have already priced in a 25-bps cut, a 50-bps cut could send a negative signal regarding economic health.

Vinod Nair, Head of Research at Geojit Financial Services, said, "Although a 25-bps cut is largely factored in, the market remains attuned to the Fed's comments on the health of the economy and the future trajectory of rate cuts."

Manish Chowdhury, Head of Research at StoxBox, said, “A 25-basis-point rate cut looks seemingly priced in currently. We believe that a 50-basis-point cut would send a cautious signal to the market and weigh negatively on market sentiment.” He expects the Fed to strike a balance between its dual mandate of inflation and unemployment, ensuring it does not sound desperate to spur the economy in the face of the anticipated slowdown.

On the other hand, some market participants are speculating a more aggressive 50-75 bps cut. This speculation was fuelled by a recent letter from three Democratic senators urging Powell to aggressively slash the central bank’s benchmark interest rate by up to 75 basis points this week to save the US economy from recession.

“If the Fed is too cautious in cutting rates, it would needlessly risk our economy heading towards a recession,” Senators Elizabeth Warren, Sheldon Whitehouse, and John Hickenlooper stated in a letter to Powell, as reported by Bloomberg.

India’s equity market had a remarkable last week, with both the BSE Sensex and NSE Nifty hitting new all-time highs on Thursday. The BSE benchmark crossed the 83,000 mark for the first time.

In addition, Japan's inflation data due on Friday, followed by the Bank of Japan's (BoJ) monetary policy announcement, will be closely watched. Other crucial factors influencing market sentiment include Foreign Institutional Investor (FII) flows, geopolitical developments, and crude oil prices.

According to a Reuters poll, the Federal Reserve is expected to cut interest rates by 25 basis points at each of the US central bank's three remaining policy meetings in 2024. Only nine out of 101 economists anticipate a half-percentage-point cut this week.

In its previous FOMC meeting chaired by Powell, the Fed decided to keep the key interest rate unchanged, maintaining it at 5.25-5.50 percent. This upcoming decision could mark the Fed's first rate cut since March 2020, when rates were slashed to near zero to support the economy during the Covid-19 outbreak.

The Fed began raising interest rates in 2022 in response to a surge in inflation caused by post-pandemic supply chain disruptions and the ongoing conflict in Ukraine. The key lending rate has remained at a two-decade high of 5.25-5.50 percent for the past 14 months.

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.