Kolkata: The two-day meeting of the rate-setting FOMC of the US Fed is beginning today amid expectations that Federal Reserve chairman Jerome Powell will have to cut policy rates in response to the disappointing job market data in the US in recent weeks. Significantly, the US central bank held rates steady in five consecutive meetings over the past nine months. If the Fed opts for a 25 bps cut, the federal funds rate would decline to 4.00-4.25%.
The decision of the US fed will be communicated on September 17. The expectation is that Powell is going to slash the `interest rates by 25 basis points. In his policy to keep rates steady over the past few months, Powell has incurred the wrath of US President Donald Trump, who is desperate to see the rates climb down. In fact, Trump is so keen to see lower interest rates that he has even threatened to get an intransigent Powel replaced since he refused to play ball and wanted to take a call based on emerging economic data.
Job slowdown, unemployment claims rising
Latest economic data has indicated that jobs are not rising anywhere close to expectations and unemployment claims going up. Only 22,000 jobs were generated in August. Therefore, an easy money policy is expected to rev up growth which is expected to suffer due to the retaliatory tariffs imposed on a large number of goods that the US has traditionally imported. US companies are not very keen on hiring due to uncertainty in the air created by unpredictable import taxes. Inflation has also inched up a bit — consumer price index rose in August. Annual core inflation has gone up to 3.1% against the target of 2%.
Indian equity markets and the Fed rate cut
Any rate cut by the US Fed is a welcome signal for the Indian equity markets which has been moving sideways for a few months. However, since a rate cut of 25 basis points is expected, the Indian stock markets might not display a lot of enthusiasm. It has already been factored in, say analysts. However, Indian bonds could get a fillip since the spread would become attractive in favour of the Indian bonds.
However, if the US Fed decides to slash rates by 50 points, which is not expected, the equity markets is likely to react favourably. Such a cut could trigger capex and investments in the US markets but since the tariff barriers remain, it will fail to spread proportionate cheer in the Indian equity markets. Significantly, it can lead to greater FPI inflows in the Indian market. Taking the Sebi reforms on FPI inflows, it will be welcome by the markets.
In the unlikely event of the Fed keeping rates steady, it could trigger further volatility in the Indian markets. However, all analysts are of the opinion that the mood of the Indian equity markets is far more dependent on the tariff barrier.
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