US Fed rate cut: Avoiding a negative surprise for the markets, the Jerome Powell-led Federal Open Market Committee (FOMC) cut benchmark interest rates for the third consecutive time on December 10, bringing the federal funds rate to 3.50%–3.75%, its lowest level since 2022. This was the Fed’s third rate cut of the year. In September and October, the central bank delivered cuts of 25 basis points each. In total, the Fed has reduced the federal funds rate by 0.75 percentage points this year.
On expected lines, the central bank was divided in its decision, as nine out of the 12 members voted in favour of the rate cut, while one member felt the need for a 50 basis point rate cut.
Meanwhile, as Reuters reported, only four policymakers actually projected a single rate cut next year, with another four expecting two cuts and four others anticipating even more.
However, the Fed’s future policy path will rely on the incoming data as the central bank underscored the conflicting signs of slowing growth and elevated inflation visible in the US economy.
“Job gains have slowed this year, and the unemployment rate has edged up through September. More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated,” said the FOMC.
According to Jeffrey Roach, Chief Economist for LPL Financial, there is no risk-free path for monetary policy. The committee appears to be relying on higher productivity, suggesting stronger growth despite slower job creation.
“Projections with stronger growth and lower unemployment suggest the Fed will remain committed to bringing inflation down. Investors should expect the Fed to remain on hold in Q1, especially if the economy responds to the tailwinds from fiscal and policy support. The first cut next year may come in Q2,” said Roach.
Some experts believe this could be the end of the monetary easing cycle in the US.
“With two strong dissenters against the move, the current backdrop highlights how difficult the decision to cut rates really is. Softer labour conditions are the impetus to continue cutting rates, but one could argue that most of the shifts in the labour market are structural and are of no benefit from a policy cut. On the other side of the equation, you have inflation, albeit slow, moving away from the Fed’s two-per-cent target,” Charlie Ripley, Senior Investment Strategist for Allianz Investment Management, observed.
“Looking ahead, this could very well be the final rate cut that Chairman Powell delivers, and while we have not gotten back to neutral from a rate perspective, one could argue that the progress on inflation has been measurable. Whoever assumes the role in the Fed’s next era will contend with the same difficult balance, especially with the voting members rotating in holding a hawkish perception of the market,” said Ripley.
US Fed rate cut: How can it impact the Indian stock market?
The Indian stock market is unlikely to see a significant reaction to the Fed policy, as the policy decision is on expected lines, and the Fed has given mixed signals about the future interest rate trajectory.
“We do not think the Fed’s move will have a major impact on the Indian stock market. The domestic market is struggling with liquidity problems due to the flood of IPOs. The IPO rush needs to fizzle out for the stock market to sustain gains,” said G Chokkalingam, the founder and head of research at Equinomics Research Private Limited.
VK Vijayakumar, Chief Investment Strategist, Geojit Investments, noted that the dot plot indicates one more rate cut in 2026 and another in 2027. An interesting aspect of this decision is the 9–3 vote, the first such split perhaps since 2019. This divergence among policymakers is likely to influence rate decisions in the coming years.
“As Chair Jerome Powell mentioned, the Fed is waiting for more data on how the economy evolves. So, while one more rate cut seems likely, the actual path may change depending on economic conditions,” said Vijayakumar.
“Markets will likely interpret the outcome as mixed, especially because the latest US inflation data available is only from September due to the government shutdown,” said Vijayakumar.
Vijayakumar believes that the direct impact of the US Fed policy will be nominal on the Indian stock market, as the domestic market is currently weighed down by two key domestic factors: relentless FII selling and weak corporate earnings over the last six quarters.
Overall, the Fed’s decision will have only a muted impact on the Indian stock market, as it is more focused on domestic earnings, growth trends, and developments like the US-India trade deal.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
