The global financial markets reacted positively following the US Federal Reserve's highly anticipated decision to reduce the policy rate by 50 basis points (bps) — the first cut in four years. This move, led by Fed Chair Jerome Powell, marks a significant shift from the elevated interest rates maintained since July 2023. As markets digested the news, indices such as Sensex and Nifty 50 soared to record highs, while commodities and currencies experienced volatility. Below, we unpack the key takeaways, sector impacts, and future policy implications for both the US and global markets.
Key Takeaways:
Fed Policy Rate Cut: Reduced by 50 bps to 4.75%-5%, marking the first cut since 2020.
Future Projections: Policymakers anticipate further reductions of 50 bps by year-end, an additional full percentage point in 2025, and another half-point cut in 2026.
US Inflation: Inflation fell to a three-year low of 2.5% in August 2024, close to the Fed’s 2% target.
Global Markets: Sensex and Nifty 50 surged to all-time highs following the Fed's decision.
Global Market Response
Global markets, including India’s Sensex and Nifty 50, rallied following the Fed’s announcement of a 50 bps rate cut.
Sensex: Jumped by 410.94 points to reach 83,359.17, marking a record high.
Nifty 50: Rose by 109.50 points, hitting 25,487.05.
Hong Kong: The Hong Kong Monetary Authority (HKMA) followed suit, cutting its base rate by 50 bps to 5.25%. This move is expected to positively impact the region's economy.
Japan’s Nikkei: Rallied 2.1%, with the Topix index up by 1.9%. South Korea’s Kospi and Kosdaq also posted gains in early trading.
US Economic Context
The US Federal Reserve, in its sixth policy meeting of 2024, cut the benchmark rate by 50 bps to a range of 4.75% to 5%. This cut comes as inflation continues to cool and employment remains a central focus.
Inflation: Dropped to 2.5% in August 2024 from its 9.1% peak in 2022, nearing the Fed’s long-term target of 2%.
Economic Strategy: The rate-setting panel aims to engineer a rare "soft landing" by lowering inflation without causing a major recession.
Sectoral Impact in India
India’s Reserve Bank of India (RBI) is now expected to follow the Fed’s lead and cut rates in the coming months. Experts predict this will have a mixed impact on various sectors.
Leveraged Sectors: Industries such as metals and infrastructure are expected to benefit from lower borrowing costs.
Banking Sector: However, the banking sector may face challenges, with lower customer deposits and shrinking CASA (current account savings account) growth.
Commodities and Currency Markets Reaction
The commodities market saw immediate shifts following the Fed's decision, particularly in gold and oil prices.
Gold: After hitting a record high of $2,599.92 per ounce, gold prices retreated to $2,552.49 as the US dollar and Treasury yields climbed.
Source: Tradingview
Crude Oil: Prices dipped, with Brent crude futures down by 0.46% to $73.31 per barrel. Concerns over the US economy tempered demand.
Source: Nasdaq
US Dollar: Recovered after initial losses, gaining 0.58% against the yen and strengthening broadly across major currencies.
Source: Tradingview
Wall Street and Stock Market Reactions
Despite the rate cut, US stock markets ended lower as investors weighed the implications of the Fed’s dovish stance.
S&P 500: Dropped by 0.29% to 5,618.21 points after erasing a 1% intraday gain.
Source: Marketwatch
Nasdaq Composite: Fell 0.30% to close at 17,575.67 points.
Source: Marketwatch
Dow Jones: Declined by 0.23%, ending the day at 41,508.88.
Source: Marketwatch
Investor Concerns: Despite initial optimism, some investors remain concerned that further rate cuts could signal deeper economic issues, similar to those seen in 2001 and 2007 when recessions followed rate cuts.
Future Monetary Policy
Looking ahead, the Fed signaled additional rate cuts in the coming years, though policymakers remain cautious about moving too quickly. Another 50 bps cut is expected by year-end, with further reductions in 2025 and 2026. The Fed will continue reducing its holdings of Treasury securities, agency debt, and mortgage-backed securities. Fed Chair Jerome Powell emphasized that while inflation is under control, the Fed will continue monitoring employment and inflation data closely before making any significant policy changes.
