Post Fed rate cuts, Julius Baer's Unmesh predicts continued weakness in US Dollar and stronger FPI sentiment for India

Federal Reserve Outlook

The Fed’s rate-setting committee (FOMC) delivered the widely anticipated 25 bps rate cut on 17 September, taking the Fed policy rate to 4.00- 4.25 percent. This was the first rate cut in CY25, after a 9-month pause by the Fed, since December 2024.

The FOMC keeps its twin objectives in mind while deciding policy actions - ensuring stable prices as well as full employment. The Fed’s current assessment is that the US economic activity has moderated, and the job gains have slowed. The Fed Chair Jerome Powell mentioned that the downside risks to employment appear to have risen. The unemployment rate printed 4.3 percent in August, which is higher than earlier months, but not very high by historical standards. The Fed committee also acknowledged that inflation has moved up and remains somewhat elevated.

The dot plot

The FOMC’s ‘dot plot’ is a widely followed barometer to gauge the likely future direction of the Fed rate. The dot plot represents the future projections of the Fed rate made by the individual members of the FOMC over the current and next couple of years.

The latest dot plot released presents a divided house on the rate projections. The majority of the FOMC are projecting two additional rate cuts this year (i.e., by December 2025), whereas many members are projecting only one additional rate cut this year. The consensus projection beyond the current year is only one rate cut in 2026 and one more to follow in 2027, taking the Fed rate to a long-run neutral level of 3 percent.

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Unmesh Kulkarni

Managing Director Senior Advisor|Julius Baer India

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Global market reaction

The overall market reaction in the US to the Fed decision was muted. Equity markets and bond markets witnessed a minor correction due to profit-booking post the FOMC announcement. Markets were a bit disappointed that Powell described the rate cut as "risk management", and did not signal the start of a long-run rate-lowering cycle.

The dot plot was also divided in terms of the quantum of the rate cuts. With only one rate cut projected in 2026, is the Fed sending out a slightly hawkish message? Was this rate action more of an insurance cut? The employment (jobs) data has been the primary driver of the rate cut, and the job numbers, while being on the lower side, are not too bad from a historical perspective.

Moreover, global markets had already rallied in the days leading to the FOMC meeting, with the S&P 500 and the Nasdaq 100 reaching new highs, gold and silver too creating new highs, the US Treasuries rallying, and the US 10YT yield falling by about 35 bps to 4.0 percent levels. Given the euphoria prevailing in the global markets before the FOMC, it is quite possible that, with the widely anticipated rate cut now behind us, and the not-so-clear message emanating from the Fed, global markets may take a breather and witness some near-term profit booking – equities and maybe gold and silver, that were sentiment-beneficiaries of the rate cut expectations.

Our global research expects the Fed to carry out two additional rate cuts of 25 bps until December, and additional cut(s) until March. The inflation increase in the US from the tariff situation is expected to be transitory, with the slowing growth and demand offsetting some of the tariff impact. The balanced US growth outlook in the coming months is likely to drive the FOMC into a gradual transition from a restrictive monetary policy to a neutral stance.

The bullion markets may see some profit-taking by short-term and speculative investors; however, our global research remains ‘constructive’ on gold and silver. A cooling US economy, lower US interest rates, and a weaker US dollar should continue luring investors into the gold and silver markets, while central-bank gold-buying should resume.

How does the Fed rate cut affect the Indian markets?

The overall positive global sentiment ahead of the Fed meeting has recently kept the Indian markets buoyant. With the Fed rate cuts resuming, it is expected that the current weakness in the US Dollar should continue. Indian markets have seen very high levels of selling this year from Foreign Portfolio Investors (FPIs), and given the dollar weakness along with the resumption of trade talks between India and USA, plus the fact that India continues to be one of the fastest-growing economies, the FPI sentiment for India should improve, going forward. Domestic earnings growth is expected to pick up from Q3FY25, and this will likely provide an additional boost to the sentiment for Indian equities.

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