The results of the Federal Open Market Committee's September policy meeting could potentially be a major trigger for global markets — or maybe not.

The results of the Federal Open Market Committee's September policy meeting could potentially be a major trigger for global markets — or maybe not. While it's uncertain what decision the US Federal Reserve will make regarding interest rates on September 17-18, there is widespread confidence that a rate cut is likely to happen.

Rate cuts are typically positive for the market, but this time, it's the size of the cut that could have a bigger impact. According to the Fed watch tool, there's now a 31% chance of a 50 basis points (bps) rate cut, down from 44% last week, and a 69% chance of a 25 bps cut, up from 56% last week. Most have already factored in a 25 bps rate cut.

Inflation Drops, Fed Rate Cuts Likely

Despite these challenges, the US has successfully brought inflation down to manageable levels. In August 2024, the annual inflation rate in the US reached 2.9%, the lowest since March 2021. This is a big improvement from the 6.5% recorded in 2022 and even the 3.3% figure from June 2024.

Fed Chairman’s recent statement hinted at a change in policy direction, noting that the Fed is now preparing to lower rates. He emphasized that the timing of rate cuts would depend on further economic data. Given the current inflation trends, many experts expect a rate cut in the upcoming September Fed meeting. However, the focus will now be on how much the rate will be reduced.

Impact of Fed Rate Cuts on Global Markets

The US Fed rate has global consequences. When the Fed lowers interest rates, it influences markets around the world.

Currency Exchange Rates: The US dollar could weaken, making American goods and services more affordable for foreign buyers. This can boost US exports but might lead to higher prices for imports.

Capital Flows: As US investors look for better returns, they may invest abroad, leading to capital outflows from the US. This shift can pressure emerging markets and currencies.

Stock Markets: Lower rates tend to stimulate economic growth, which can increase corporate earnings and stock prices. However, this effect will vary by sector.

Bond Markets: When rates fall, bond prices generally rise, benefiting bondholders. But new investors may face lower returns on fresh investments.

Commodities: As interest rates drop, demand for commodities like oil and metals may rise, pushing prices higher.

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Indian Markets: A Beneficiary of Fed Rate Cuts?

A Fed rate cut could benefit India by attracting more foreign investment. With lower returns on US Treasury bonds, investors might turn to emerging markets like India, boosting the prices of Indian stocks and bonds. This influx of foreign capital could also strengthen the rupee, leading to a temporary appreciation against the dollar. Additionally, India's bond market may rally, reducing borrowing costs for businesses and the government, and potentially accelerating economic growth.