25 of 50: How much will the Fed cut rates to start the policy easing cycle?
Jerome Powell, the 16th Chairman of the US Federal Reserve Bank.
As markets globally head into next trading week, investors around the world are eagerly awaiting the Federal Reserve’s interest rate decision, expected to be announced on Wednesday.
The Federal Open Market Committee (FOMC) meeting, which ends on September 18, will reveal whether the policy easing cycle will begin with an aggressive, excessive cut or whether it will be closer to the lower bound of what has been speculated.
“The first rate cut by the Federal Reserve in four years is a foregone conclusion. The only uncertainty is the magnitude of the rate cut, that is, whether it will be 25 basis points (bps) or 50 bps,” said Dr VK Vijayakumar, chief investment strategist, Geojit Financial Services.
A Reuters report on Friday, September 13, tracking trading in interest rate futures contracts found that the Fed is almost as likely to deliver an outsized rate cut next week as a more typical cut.
The report noted that futures tied to the Fed’s policy rate reflected a 47 percent chance that the policy rate would be cut by half a percentage point. However, the report added that a quarter-point cut was still seen as slightly more likely.
Whatever the policy decision, experts who follow the Fed’s moves say markets are likely to react volatilely. “If the Fed cuts rates by 50 bps, markets are expected to shoot up, but I believe markets will correct just as suddenly as such a big cut will look desperate,” said Ambareesh Baliga, an independent market analyst.
Baliga is counting on the Fed to cut rates gradually, since it has been putting it off for so long. According to him, the US central bank will therefore go for a 25 bps cut to start the cycle.
“Several traders have already priced a rate cut in September amid the pessimistic mood and a series of sharp falls in equity markets. Market sentiment is predicting a rate cut of 25 basis points,” said Palka Arora Chopra, managing director at securities firm Master Capital Services.
In addition, expectations of a 25 basis point rate cut strengthened after the US Consumer Price Index (CPI) data released on Wednesday, September 11, showed a year-on-year decline in inflation from 2.9 percent to 2.5 percent. Meanwhile, core inflation remained steady at 3.2 percent.
Analysts also believe that the Fed’s commentary and outlook will play a crucial role in determining the size and frequency of future rate cuts before the end of this year, as well as influencing market sentiment around the world.
Analysts added that a 50 basis point rate cut by the Fed would mean the US labor market is still shaky, while a lower rate cut of 25 basis points would indicate a more dovish strategy from the central bank.
Swapnil Aggarwal, managing director at VSRK Capital, said: “The market reaction will depend on the motivations behind the Fed’s decision. If the rate cut is a response to concerns about a slowing economy or rising unemployment, the positive market effect could be muted.”
However, Aggarwal added that if the Fed cuts rates amid low inflation and stable growth prospects, markets could rise in response to the more favorable lending environment.
First publication: Sep 17, 2024 | 06:43 AM IST