Fed meeting starts today, rate cut on the cards. Here’s what experts are saying

Around the world, all eyes will be on the US Federal Reserve meeting, which starts today, and will announce changes in interest rates, if any, after concluding its two-day meet tomorrow i.e. on 18th September.

Most experts are anticipating a 25 basis point rate cut, while some suggest a sharper, 50 basis point rate cut might also be possible.

According to the CME FedWatch tool, there is an 85% probability of a 25 basis point rate cut in September. However, the firmer-than-expected core inflation reading will perhaps make it more difficult for Fed chairman Jerome Powell to justify a 50 basis point cut in September.

However, as Gaurav Garg from Lemonn, a trading and investing platform explains, “a bold 50-basis-points (bps) rate cut could ignite optimism leading to weaker dollar and further inflows into emerging markets like India, while a cautious 25 bps move may trigger disappointment, with markets currently pricing increasing odds for a bigger cut”.

Historically, a rate cut fuels optimism in the domestic markets, as it reduces corporate borrowing costs and increases consumer spending power.

Lower interest rates also implies cheaper borrowing, which is advantageous for homeowners looking for lower mortgage rates.

“The reduction in borrowing costs may promote demand in the home market as well as encourage refinancing activity”, says Swapnil Aggarwal, Director, VSRK Capital

“However, the market’s reaction will depend on the motivations behind the Fed’s decision. If the rate cut is in response to concerns about a slowing economy or rising unemployment, the positive market effect could be muted. But if the Fed is cutting rates due to low inflation and a stable growth outlook, markets may rally in response to the more favorable borrowing environment”, Agarwal continued.

After this, the Fed would convene between November 5-7. Two key employment reports, which are due before the Fed announces its November outcome, are likely to impact this. However, as experts see it, there is a slight leaning towards a 50 basis point rate cut in November, with the probability currently at 52.4%, as per CME FedWatch

For December, the likelihood of another 50 basis point rate cut increases significantly, with the probability standing at 80.4%.

“Given the higher probability, if November sees only a 25 basis point cut, it is likely that a 50 basis point cut will follow in December”, says Alex Volkov, a market analyst at VT Markets.