US Fed Goes Big On Rate Cut To Boost Growth — What Analysts Make Of The Move

The US Federal Reserve slashed its key rate for the first time in more than four years by 50 basis points to 4.75-5.00% on Wednesday, to stage a soft landing.

The big cut was as per expectations, as traders weighed on deeper cuts just ahead of the decision. "Dot plot" of Fed officials' commentary now expects to lower rates by one percentage point by year-end.

The Fed is not in a pre-set course and dot plot projections are not a policy plan, Chair Jerome Powell stated. "Our recalibrated policy stance will help maintain the strength of our economy and the labour market and continue."

Upside inflation risks have diminished and downside risks to employment have increased, Fed Chair Powell said in the press conference after the rate decision. "The rate cut is timely and don't think we are behind."

Here's what analysts have to say about the economic impact of the FOMC decision.

The equities in the emerging markets will stand to benefit from dollar weakening as a result of the big shift from the US central bank, according to Geoff Dennis, independent emerging markets commentator.

This is the start of a big interest rate cut cycle and that will bring the dollar down significantly, he said. "That is good for equity, but particularly that is very good for emerging market equities."

India is always expensive, but the story is very strong, he said. "It is not the time to rotate from China to India right now." India and Taiwan have been the big divers for the emerging markets this year and the lower dollar will provide support for the rupee, he said.

The inflation data has remarkably gotten better in the third quarter and it gives the Fed more room to take some more insurance against an economic downturn, Dennis said. Although the economy does look okay, the labour markets have weakened. "I think you treat it as a start of a Fed fund cycle and is a bit of an insurance."

Jumbo cuts are typically taken in times of crisis and this isn't a typical move to start off in a period where the economy is holding up relatively well, according to Robert Sockin, global economist, Citi Research.

The comment by Jerome Powell sounded like a risk management move, having made enough progress on inflation and ensuring the economy stays strong, he said.

"The fundaments would suggest that this type of mood would typically not have been explored." It's not politics that is driving this decision and is likely a catch-up move, Sockin said.

Emerging markets in many cases have found less chance of rate cuts and the Fed's move will ease any fears of the exchange rate worries in EMs, according to him. "EMs rate cycles will begin without having to worry about those exchange rate inflows."

A lot of positives are already priced in, in the domestic markets and there could further be upside outside of the index, according to Gautam Shah, founder and chief strategist at Goldilocks Premium Research.

Bank Nifty offers great value currently and financial space are poised to do extremely well given the Fed outcome, he said.

Sentiment for domestic equities in India, in the near term, will depend on the prevailing global market sentiment, according to Unmesh Kulkarni, managing director, senior advisor, Julius Baer India. "The Indian economy in itself is on a solid footing and compares favorably over other Emerging Markets."

Valuations however are rich, and this may limit the near-term upside unless there is a runaway global rally, he said.

Historically, Fed easing cycles have been particularly supportive for emerging market equities, in absence of a recession, Kulkarni said. "However, it is important to assess whether the US economy is heading for a soft landing or into a hard landing, as this will determine the market sentiment through the rate cut cycle."

Fed rate cuts are positive for India and may see an increase in FPI allocations, according to Nilesh Shah, founder, Envision Capital. "Believe narrative for India is stronger and more compelling compared against global peers."

India well poised to deliver higher growth backed by strong policy response, he said.

"Global funds have been under-allocated towards India; as they increase their holdings, banks may be poised for a pick-up."

There is a disconnect between what Jerome Powell said and by how much the key rate was slashed, according to Kenny Polcari, senior market strategist of Slatestone Wealth.

Powell said the economy is strong, inflation is coming down, and market is strong, but ended up with a crisis type of rate cut, according to Polcari. "It doesn't make sense and there is a disconnect there."

Just weeks ahead of the US Presidential election, the big banks and the futures markets were all pricing in a 50 basis point cut, with some pushing for a 75 bps cut, he noted. "It screams of political pandering."

Markets rallied and then it sold off, but there is going to be a digestion of his conversation and then stocks will back off with the election six weeks away, Polcari said.

The US Federal Reserve kicked off its easing cycle with a somewhat surprising 50 basis points, said Madhavi Arora, chief economist, Emkay Global. "This start to the easing cycle provides some space to EMs to kick-start theirs too."

With low global volatility thus far, the Reserve Bank of India is likely to remain focused on domestic dynamics, with its first rate cut by December, according to Arora.

The contradiction between an outsized cut and a healthy economy proved tricky to justify, Arora said. "Markets are expecting much more easing than projected with the UST curve bear-steepening on account of Powell’s pushback against larger cuts ahead."

The Federal Reserve's rate cut could prompt similar actions by the Reserve Bank of India in late 2024 or early 2025, especially if inflation remains low, according to Vipul Bhowar, Senior Director, Listed Investments, Waterfield Advisors.

The rate cut is expected to boost Indian equities and attract foreign investment in the short term, he said. "However, it also raises concerns about underlying weaknesses in the US economy and could lead to increased market volatility."

The rate cut presents opportunities for growth in sectors such as banking, IT, real estate, and consumer goods in India but also carries risks due to global economic uncertainties and potential volatility in foreign investment flows, he said.