US Fed Meeting Today: Why Does it Matter for Indian Markets, Is Rate Cut Possible?

The two-day meeting of the US Federal Reserve to decide on the interest rates in America is going to conclude today and the outcome will be announced at 11:30 pm IST. According to analysts, the Federal Open Market Committee (FOMC), the rate-setting authority in the US, is expected to keep its benchmark interest rate unchanged at 5.25-5.50 per cent on Wednesday, while laying the foundation for a rate cut in September.

The US central bank has been holding the interest rates for the past one year since July 2023. Before that, between March 2022 and July 2023, the US Federal Reserve raised the interest rates by 525 basis points to control inflation, which hit a multi-decade high amid the Ukraine-Russia war and COVID restrictions.

A basis point is 100th of a percentage point.

Now, as the retail inflation in the US has fallen steadily closer to the Fed’s 2% target for the past several months, there are expectations that the US Fed will start cutting interest rates from September 2024 to push economic growth. After today, the FOMC meeting will take place on September 17-18.

The last interest rate cut in the US took place in March 15, 2020.

According to the latest data, yearly inflation in the US fell to 2.5% in July. The separate latest data showed that the US economy also grew faster than expected at 2.8 per cent in the second quarter solid gains in consumer spending and business investment. The Q2 GDP growth was double the 1.4% growth pace in the first quarter.

Why Is US Fed Expected to Keep Rates Unchanged Today?

Though the inflation rate in the US has come under control at 2.5 per cent in July 2024 as against a 40-year high of 9.1% in June 2022, experts believe that the US Fed will wait for two more months before start cutting rates as July 2024 will be a bit soon to cut rates as inflation is still yet to come under 2 per cent target.

“While I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted,” Christopher Waller, a member of the Fed’s governing board, said earlier this month.

How Will It Impact Indian Markets?

Though the status quo on rates tonight will not impact the markets majorly, the US Fed’s commentary on the possibility of rate cut in September is likely to be supportive for markets in India.

A fall in interest rates will positively impact Indian markets in two ways — first, it will boost US growth which will positively impact India’s IT sector and other exports; and secondly, it will make the US dollar cheaper to boost India’s rupee in comparison and boost capital inflows here.

Amit Goel, co-founder & chief global strategist, Pace 360, said, “We believe the US Fed will convey a high probability of a rate cut in its September meeting. This should have a positive impact on the Indian market, which has been hovering near the magical 25,000 on Nifty for the last few days. We see a high probability of Nifty opening with a gap-up post-Fed and continue its march beyond 25,000 levels.”

Any signal indicating a higher probability of a rate cut in September will cause gold and equity prices to rise, he added.

Goel said the communications from the July meeting will offer only tentative hints of a September cut. The main reason for the hesitation is simply the amount of data still to come before the Sept. 17-18 FOMC meeting. There are two more inflation and job reports before then, and the data could change considerably.