US Fed Poised to Announce First Rate Cut in 4 Years: How Will the Stock Market React?

The much-anticipated day for the US Federal Reserve’s pivot has arrived. The world’s largest central bank is expected to cut interest rates for the first time in four years since March 2020, during its Federal Open Market Committee (FOMC) meeting on September 17-18. The decision will be announced today at 2 pm ET by Fed Chair Jerome Powell, followed by a crucial press conference at 2:30 pm.

The debate among policymakers is likely to center on whether to move by 25 or 50 basis points (bps). A 25-bps cut is widely expected and already priced in by the markets, while a 50-bps cut could signal a more aggressive approach to support the economy. However, some analysts caution that a larger cut might also raise concerns about the economic health, potentially dampening market sentiment.

What to Expect from the Fed’s Decision?

The Fed’s decision will have a significant impact on the global markets, including India. Investors are eagerly awaiting Powell’s comments on inflation, employment, and the future trajectory of rate cuts, which will set the tone for market sentiment.

A 25-bps cut is largely factored in by the markets, but investors remain attuned to the Fed’s comments on the economy’s health and the future path of rate cuts. Experts believe this could be the start of a series of rate cuts, with the market anticipating up to five cuts by the end of the year, translating to 1.25 percentage points.

However, some market participants are speculating a more aggressive 50-75 bps cut, fueled by a recent letter from three Democratic senators urging Powell to slash rates to avoid a potential recession. If the Fed is too cautious in cutting rates, it could risk the economy heading towards a recession, the senators stated.

How Will the Stock Market React?

The stock market’s reaction to the Fed’s decision remains uncertain. While a larger cut would typically boost equities, it could also raise concerns about the economy’s health, potentially dampening sentiment. Conversely, a 25-bps cut might disappoint markets that have priced in a more substantial reduction.

In the medium term, the policy trajectory, guided by incoming data, will dictate market direction. History suggests that the start of a rate-cut cycle alone is not a reliable trigger for market rallies. The performance of equity markets after the Fed’s first rate cut varies depending on economic conditions and starting valuations.

What About India’s Stock Market?

India’s equity market had a remarkable last week, with both the BSE Sensex and NSE Nifty hitting new all-time highs on Thursday. The BSE benchmark crossed the 83,000 mark for the first time. However, the Indian market’s reaction to the US Fed’s rate cut decision remains to be seen.

Other crucial factors influencing market sentiment include Foreign Institutional Investor (FII) flows, geopolitical developments, and crude oil prices. The Bank of Japan’s (BoJ) monetary policy announcement on Friday will also be closely watched.