The US Federal Reserve is likely to announce the first interest rate cut after more than four years in its upcoming policy meeting, which shall be announced on Wednesday, September 18. However, the bigger question is if the US central bank slash the interest rate by 25 or 50 basis points (bps).
Fed chair Jerome Powell has in recent weeks indicated that a rate cut is coming this month, as inflation eases toward the bank's long-term target of two per cent, and the labor market continues to cool. The US Fed had dragged the interest rates near zero during the Covid-19 pandemic.
Analysts have been eagerly waiting eagerly for a cut in 2024 but have been disappointed by the US Fed which stated earlier that three cuts will be done in the year 2024, said Sharad Chandra Shukla, Director at Mehta equities. US inflation numbers have come down to a reasonable level. The market is discounting a 50-bps rate cut, he said.
If inflation is below the Fed's target, a rate cut can help to stimulate the slowing economy, boost demand and push for higher growth. Persistent low inflation can lead to economic stagnation, said Palka Arora Chopra, Director at Master Capital Services.
Rate cuts, in general, are positive for equity markets. All the global markets will see some impact of the rate cut announcements and India is a no exception. However, market analysts of Dalal Street believe that the rate cut is unlikely to have a major impact on the market as it is already priced in. However, a 50-bps rate cut may alarm the economies, some caution.
Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers anticipates a 25-bps rate cut in the upcoming policy meeting, signaling a shift from a focus on strict inflation control to a greater emphasis on supporting economic growth. "A modest cut suggests the Fed does not expect a severe recession and remains cautious of inflation," he said.
On the other hand, market participants believe that a 50-bps rate cut might lead to a short-term rally in the equity market, but will also highlight the increased concern about economic growth and fears of recession. An aggressive rate cut may imply that the US central bank may prioritize immediate economic support over inflationary concerns.
A 25bps rate cut is widely expected and already priced in, so we anticipate limited market reaction following the announcement, said Amit Golia, Group CEO, MarketsMojo. "However, with US job data falling short of expectations for the second consecutive time, the Federal Reserve may even consider a 50bps cut to help stimulate the slowing economy," he said.
"The Fed is aiming to stay ahead of potential challenges. However, a larger rate cut doesn’t necessarily guarantee a market rally. Historically, significant rate cuts have not always been perceived positively and could trigger further sell-offs," he added.
The extent of the rate cut will depend on the incoming data. If the latest data and evolving outlook indicate significant slowdown in the economy and very low job generation, the Fed may go for a 50 bp rate cut. But the probability of a 50bp rate cut appears low now, said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
"Normally a 50 bp rate cut will be good news for the stock markets. But this time it need not be so. The market may interpret it as a signal that the economy is tipping into recession," he said.
Chopra from Master Capital said a significant cut of 50 bps is larger than the more typical 25 bps cut, signaling a more aggressive need to stimulate the economy.
However, not all experts see a 50-bps rate cut as a negative for the markets and believe that an aggressive rate cut will trigger the rally in equity markets. Also, the US is likely to see the presidential election in the next two months, which will be another factor to watch out for.
Shukla from Mehta Equities does not think that a 50-bps rate cut will indicate that a slowdown has started. The possibility of the USA having a recession in 2025 looks to be unlikely, he said.
Echoing similar views, Kranthi Bathini, Director of Equity Strategy at WealthMills Securities said that the market has already priced-to-perfection for a 25-bps rate cut and a 50-bps cut will be more positive, which will signal that the US Fed is now looking to support the economic growth.