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25 or 50: How much will the Fed cut rates to begin its policy easing cycle?
Source: Business Standard
Jerome Powell, the 16th chair of the Federal Reserve Bank of the US.
As markets globally head into another trading week, investors around the world are eagerly awaiting the Federal Reserve’s interest rate policy decision, set to be announced on Wednesday.
The Federal Open Market Committee (FOMC) meeting, slated to conclude on September 18, will raise the curtains on whether the policy easing cycle will begin with an aggressive, outsized cut or be closer to the lower band of what is being speculated.
“The first rate cut by the Federal Reserve in four years is a foregone conclusion. The only uncertainty is about the extent of the rate cut, that is, whether the cut will be 25 basis points (bps) or 50 bps,” said Dr. V K Vijayakumar, chief investment strategist of Geojit Financial Services.
Tracking trading in rate-futures contracts, a Reuters report on Friday, September 13, suggested the Fed is nearly as likely to deliver an outsized interest-rate cut next week as a more-usual-sized reduction.
The report noted that futures tied to the Fed’s policy rate reflected a 47 per cent chance that it will cut its policy rate by half a percentage point. However, the report added that a quarter-point reduction was still seen as slightly more likely.
Whatever the policy decision, markets are likely to react volatilely, according to experts tracking the Fed’s moves. “If the Fed cuts the rate by 50 bps, then markets are expected to shoot up, but I’m of the view that markets will correct (just) as suddenly, as such a big cut will look desperate,” said Ambareesh Baliga, an independent Market Analyst.
Baliga reckons that the Fed will cut interest rates in a gradual manner, as it has postponed it for so long. Thus, according to him, the US central bank will go for a 25-bps cut to begin the cycle.
“Several traders have priced in a rate cut by September due to the pessimistic mood and a series of sharp down moves in stocks, and market sentiments predict a rate cut of 25 bps,” said Palka Arora Chopra, director of brokerage firm Master Capital Services.
Moreover, expectations of a 25-bps rate cut firmed up after the US consumer price index (CPI) data released on Wednesday, September 11, showed a year-on-year decline in inflation to 2.5 per cent from 2.9 per cent. Meanwhile, core inflation held steady at 3.2 per cent.
Analysts also believe that the Fed’s commentary and outlook will play a crucial role in deciphering the quantum and frequency of future rate cuts before this year ends, apart from impacting market sentiment around the world.
Analysts added that the Fed cutting interest rates by 50 bps would indicate that the US labour market is still precariously poised, while a lower 25-bps rate cut would signal a more measured strategy from the central bank.
Swapnil Aggarwal, director at VSRK Capital, said, “The market’s reaction will depend on the motivations behind the Fed’s decision. If the rate cut is in response to concerns about a slowing economy or rising unemployment, the positive market effect could be muted.”
However, Aggarwal added that if the Fed is cutting rates due to low inflation and a stable growth outlook, markets may rally in response to the more favourable borrowing environment.
First Published: Sep 17 2024 | 6:43 AM IST
