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No surprises! The US Federal Reserve’s modest 25 basis points (bps) cut in the benchmark interest rate was on expected lines. The majority decision, with the newly appointed governor Stephen Miran alone pushing for a higher cut, is the first step in US President Trump’s second term towards an easing policy cycle.
More importantly, it comes at a critical juncture when Fed chair Powell is holding steadfast to the central bank’s independence from political pressure amid sticky inflation, softer labour markets, tariff tensions and uncertainty on the US and global economic outlook.
Let’s set aside politics for a while. The US Fed is walking a tightrope with competing economic forces at play. Take note of its media release that clearly cites slowing jobs growth and sticky and elevated inflation. Wedged between these two, Chair Powell chose to tilt the policy to bolster jobs, the concern being that slowing wage growth could in the long run impact consumer sentiment.
One can argue that the Fed would usually wait it out for inflation to touch the targeted 2 percent. But this time around, the Fed members seem to believe that US prices are cooling off with Powell’s remarks stating that higher inflation in 2025 could be a one-time effect of the tariff-led impact on prices of goods and services in the country.
What’s next? More rate cuts?
Market consensus points to a dovish stance ahead -- two more 25 bps rate cuts this year to ensure growth doesn’t fall through a crevice. Judging by the statement of economic projections (SEP), the Fed committee seems willing to run the economy a bit hot next year to make sure the employment problem doesn’t get worse.
However, Robert Armstrong’s column in Financial Times (exclusively for MC Pro subscribers) explains that the median expectation conceals a very split committee. The “dot plot” recorded by each committee member reveals that seven of the nineteen committee members expect no more rate cuts this year. Another two expect just one! Miran alone opted for a 50 bps cut.
One cannot ignore the threat to the Fed’s financial independence, given Trump’s efforts to sack a governor and threats to replace the Chair, too. Does the rate cut set the pace for further easing and also acknowledge the broader political milieu?
Listless markets
No wonder global equities are hardly enthused by the much-awaited Fed rate cut. Investors are wary of economic uncertainty, persisting trade tensions and frothy valuations that are buoyed not so much by earnings ramp-up but by liquidity in the financial system. Even US stocks briefly rose on the policy decision, but lost steam to close mixed.
However, there could be a silver lining for Indian equities in these clouds of gloom. “The resumption of trade talks with the US could see a tactical rebound for both the INR and Indian equities,” says Anubhav Sahu from MC Pro Research. He is of the view that the average investor should utilise the coming weeks to rebalance their portfolios towards equities, while avoiding over allocation to gold that has already delivered a huge upside.
Investing insights from our research team
iValue Infosolutions IPO: Will this unique offering prove to be a winner?
Juniper Hotels: Why you should check into this hotel stock
What else are we reading?
If India is Asia’s fastest growing FMCG market, is urban demand slowdown a canard?
Indian Exports: A longer-term analysis reveals deep competitiveness issues
Chart of the Day | Non-aero revenue in key airports surges to match global benchmarks
How long will the government keep exporters waiting?
Start-up Street | To be continued… Sequels take hold in VC/PE industry
Peak oil is coming — but nobody seems to know when (republished from the FT) The HIRE Act Hype: Why India’s IT advantage still holds
Will Prashant Kishor’s Jan Suraaj be the ‘wild card’ in Bihar’s election?
What business leaders can learn from Prime Minister Modi
Empowering India’s Sporting Future: Aligning with National Sports Policy vision
Markets
Nifty faces broad FY26 earnings downgrades as banks, autos, IT bear the brunt
Technical Picks: HFCL, POONAWALLA, CDSL, KNRCON, TATACHEM
Vatsala Kamat
Moneycontrol Pro
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