US Fed Rate Cut: What’s Next for Markets?

The Federal Reserve recently cut interest rates dramatically, lowering them by half of one percentage point-the first reduction in four years. Surely cause for celebration among credit card debtors, car-loan debtors, homebuyers, and stock-market investors.

Much deliberation remained whether the cut should be 25 or 50 points for sure, thanks to unemployment data which were not released in full at the last meeting. However, fresh analyses were saying that employment was slowly stabilizing and so as not to belittle the more substantial cut, it was decided to go with the bigger reduction. The Fed felt the initial uncertainty was behind and went ahead with the bigger reduction after they found that numbers were coming within their control.

What does all this add up to? What it means is that when rates go lower, loans become cheaper, theoretically spurring growth and keeping unemployment from getting out of hand. The rub, of course, is that while growth is quite salutary, it can also foster a degree of inflation, too. The Fed apparently believes it is masters of that delicate balance; it certainly should be watched.

Some talk of a potential interest rate cut in November or December depending on GDP and employment trends, though the central bank has said that GDP has been around 3% growth but is steadily falling currently due to the rebalanced policies affecting the unemployment rate at 4.3%, peaked July but has steadily fallen since then. So, there's hope now that rates may fall further, hence some optimism attached with the recent cut.

In the event of a downward US rate cut, it has a spill-over effect on the Indian market when RBI takes a cue from that and thinks of reducing the interest rates. The subsequent effect of the decrease in interest rates would attract FIIs to lift their attention from the US Treasury bills to emerging countries like India. This would lead to an inflow of investment flows into the Indian equities sectors, especially in the banking and PSUs categories. Moreover, a soft dollar would make the Indian rupee stronger.

In a nutshell, any policy coming from the Fed will put a lot of things in motion around economies worldwide. Stay with us at Water and Shark for the latest on these unfolding dynamics and to stay in synch with global trends.