Investors Eye US Fed Meeting for Potential Interest Rate Cuts, Global Markets Brace for Impact

Investors across global financial markets, including India, are eagerly awaiting the outcome of the upcoming US Federal Reserve policy review meeting on September 17-18, 2024. The key focus will be on whether the Fed will implement an interest rate cut, and if so, the magnitude of the reduction.

US Federal Reserve Chair Jerome Powell recently hinted that the central bank may be ready to lower interest rates as inflation approaches the Fed’s target. Speaking at the Jackson Hole Symposium last month, Powell stated, “the time has come for policy to adjust,” but refrained from specifying the size of the potential rate cut.

Most analysts expect the Fed to begin easing monetary policy, but the extent of the rate cut remains uncertain. S&P Global Market Intelligence noted in a weekly report that the upcoming Federal Open Market Committee (FOMC) meeting is likely when the Fed will start lowering rates. However, there is still uncertainty over how much rates will be reduced this year, with investors split between expecting a 50 or 75 basis point cut.

Inflation has been a key concern for US policymakers, who aim to bring it down to 2% sustainably. Recent inflation data for August shows that inflation is steadily moderating toward that target.

In India, the Fed’s decision is expected to influence market trends. Domestic markets surged to record highs this week, bolstered by positive global cues and expectations of US rate cuts. Foreign portfolio investors have increased their investments in India, hoping for better returns amid likely rate cuts in the US.

Geojit Financial Services noted two factors driving foreign investor interest in India: expectations of US rate cuts leading to lower yields and stronger fund flows to emerging markets, and the resilience of the Indian market, which continues to show strong momentum. Despite this optimism, high valuations in India remain a concern.

Ajit Mishra, SVP of Research at Religare Broking, emphasized that next week will be crucial with the Fed meeting scheduled. While a 25 basis point rate cut is already priced in, the Fed’s guidance on inflation, growth, and future rate cuts will shape broader market sentiment, especially regarding global liquidity and risk appetite. A 50 basis point cut could trigger a positive reaction in emerging markets like India, although it may also raise concerns about the US economy’s strength.

Domestically, Indian investors will also be watching wholesale inflation data closely. Mishra advised focusing on sectors like banking, financials, IT, real estate, and metals for long trades, while remaining selective in other areas.