Moneycontrol Pro Weekender | Fed cuts rates, but projections tell a murkier story

interest rate

Dear Reader,

The highlight of the week was the Federal Open Market Committee (FOMC) decision to cut the target Fed Funds rate by 25 basis points. That was entirely as per expectations.

The median projections put real GDP growth at 1.6 percent year-over-year in 2025, the unemployment rate at 4.5 percent, PCE (Personal Consumption Expenditure) inflation at 3 percent and Core PCE inflation at 3.1 percent. All these figures are for the fourth quarter of 2025. The projections are higher for GDP growth, the same for unemployment, and the same for both PCE and core PCE inflation, compared to the June meeting’s forecasts. The big change is that these forecasts are now expected to be achieved by pruning the end-year Fed Funds rate from 3.9 percent at the June meeting to 3.6 percent. The current rate is 4-4.25 percent, so that implies two more rate cuts of 25 basis points each by the end of the year.

But monetary policy takes a long time to have an impact so perhaps the 2026 projections are more relevant. They show higher GDP, lower unemployment, and higher inflation than in the June forecasts. As this FT story, free to read for Moneycontrol Pro subscribers, said, ‘the FOMC as a whole is willing to run the economy a bit hot next year to make sure the employment problem doesn’t get worse.’ The Bank for International Settlement’s stark warnings about fiscal risks and market exuberance were, as usual, studiously ignored.

But here’s the rub—it also forecasts the Fed Funds rate to be 3.4 percent at the end of 2026, which implies just one rate cut of 25 basis points next year. That is not what the Fed Funds futures market is telling us—at present the CME FedWatch Tool says there’s a bit more than 50 percent probability that the Fed Funds rate at the end of 2026 will be 2.75-3 percent or lower.

The market is probably right—Powell will retire next year and be replaced by a Trump nominee, who is likely to do his best to push interest rates down before the Congressional mid-term elections. As we pointed out, ‘Yields on the 30-year US treasury bonds had touched 5% a couple of months back, and interest on US debt stands at a massive $1 trillion – that’s higher their defence budget. So, the US is desperate to bring down yields.’ Perhaps more importantly, the US president will try to ensure the economy gets a sugar rush before the mid-terms, to offset the disruption caused by tariffs.

How has the Trump administration affected the Fed projections? Comparing the FOMC’s March 2025 and September 2025 projections, we find that GDP growth for 2026 is expected to remain the same, at 1.8 percent; unemployment a notch higher, from 4.3 to 4.4 percent; and both PCE inflation and core PCE inflation from 2.2 percent to 2.6 percent. So the Fed expects the main impact of Trump’s tariffs to be on inflation rather than growth.

The funny thing, though, is that the median Fed Funds rate by end-2026 was forecast to be 3.4 percent in the March FOMC meeting, the same rate as in the September projection. The more things change, the more they remain the same.

The S&P 500, though, is up 16.8 percent in the last six months. That’s partly because the market expects more rate cuts and partly because of other factors, such as a fiscal stimulus, the Trump administration’s push for deregulation, and of course the AI rally.

How have the markets reacted? Equity markets both in the US and India are up. The dollar index is only slightly lower than where it was at the beginning of the week, and the US 10-year Treasury yield has, surprisingly, gone up. This FT story gives us a reason why that has happened—it points out, ‘The worry is that the absence of services disinflation reflects an economy that is running a bit above potential already, and that rate cuts might cause price increases to accelerate.’

The INR/dollar rate is more or less the same as at the start of the week and the Indian 10-year yield too has moved up a bit. Simply put, the Fed meet appears to have been ‘full of sound and fury, signifying nothing.’

Much has already been said about the wide dispersion of the dot plots, implying high uncertainty about the future path of interest rates. Indeed, at the post-meeting press conference, Powell acknowledged, ‘it’s challenging to know what to do….there are no risk free paths now.’ Perhaps Woody Allen was right when he said, ‘Confidence is what you have before you understand the problem.’

For emerging markets including India, much depends on the path of the dollar. This FT story pointed out: ‘Emerging markets are likely to be key beneficiaries. Their own prospects are better if rate cuts support US growth, and they have been cutting their own rates too, with 19 of the 21 tracked by JPMorgan on an easing path. For them, a weaker dollar means stronger local currencies, which should give overseas investors more confidence.’ A dovish Fed also makes it easier for the RBI to cut rates, with inflation remaining benign. We said that GST relief and food deflation argue for further easing.

The upshot: ‘Following income-tax and GST-rate cuts and the monetary easing already done, markets would welcome another demand-boost. This is particularly true in the context of India’s indices having remained flat for more than a year now and underperforming emerging market peers.’

So, the Fed acted, the forecasts shifted, and the markets played along — yet one is reminded, grimly, of Yeats’ The Second Coming: “The best lack all conviction, while the worst are full of passionate intensity.”

Cheers,

Manas Chakravarty

In case you missed them, here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity, and forex markets:

Stocks

Weekly Tactical Pick – A good time to add this high-growth housing finance player? GK Energy IPO, Saatvik Green Energy IPO, iValue Infosolutions IPO, Juniper Hotels, Prudent Corporate Advisory Services, Cantabil Retail India, Muthoot Finance, Euro Pratik Sales IPO, HAL, Sustainable, secured growth strengthens outlook for affordable housing finance companies, Does the blueprint to modernise defence make it a long-term bet? What does the new US Biosecure draft Act mean for the Indian CRDMO industry? Apeejay Surrendra Park Hotels,

Financial Times

Peak oil is coming — but nobody seems to know when

The Gen Z revolution is spreading in Asia

What the Fed should do

Markets

What's in store for Indian investors as Fed resumes the rate-cut cycle?

Nifty faces broad FY26 earnings downgrades as banks, autos, IT bear the brunt

How to unpack Groww’s IPO

Equity tag for REITs, another step towards global best practices

All about Sebi's new rules for Related Party Transactions

Mutual fund houses put autos in fast lane, trim banks and healthcare: Motilal Oswal

Companies & Sectors

Mid-market hospitality will spice up the hotel boom in India: IHCL top boss Puneet Chhatwal

If India is Asia’s fastest growing FMCG market, is urban demand slowdown a canard?

Why investors are holding on to banks despite earnings pressure

Non-aero revenue in key airports surges to match global benchmarks

Weight loss drugs are making their presence felt in Indian pharma market

Indian Oil’s green hydrogen bet is a brave move at a time of energy transition

Global regulations are forcing Indian companies to rethink third-party risk

Defence sector takes off

Infosys’s mega buyback follows a massive rise in free cash flows

Why data centres deserve a tax break

Economy & Policy

How food prices silently dictate headline inflation

How long will the government keep exporters waiting?

Indian Exports: A longer-term analysis reveals deep competitiveness issues

The Employment Divide: Rural India's job growth outpaces urban centres as unemployment falls to 5.1%

Why the government shouldn’t conflate autonomy with stake dilution in public sector banks

Pro Economic Tracker

Geopolitics & Geoeconomics

Nepal’s political reset under Sushila Karki: A new chapter in India-Nepal relations?

The Arab Summit's restraint masks a seismic shift in Middle East power dynamics

Fixation on Russia risks G7’s global relevance

Tech & Startups

The real challenges in India’s AI infrastructure race

Start-up Street | To be continued… Sequels take hold in VC/PE industry

US firms lead India’s GCC surge, set to establish nearly 350 new centres by 2030

Gen AI revenue lines blur, Happiest Minds pins 25% growth hopes on US market