US Federal Reserve Expected to Slash Key Rates This Week. Why Does It Matter?

summary

1. the US central bank is expected to lower interest rates
2. analysts predicting a 0.25 percentage point reduction.
3. A rate cut could inject life into global stock markets, while potentially easing current market fluctuations.

Investors are on edge ahead of the Federal Reserve's upcoming meeting on September 17-18, 2024.

For the first time in over four years, the US central bank is expected to lower interest rates, with analysts predicting a 0.25 percentage point reduction.

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A rate cut could inject life into global stock markets, while potentially easing current market fluctuations.

More critically, it could enhance the likelihood of a ‘soft landing’ for the US economy, steering through uncertainties with more finesse.

Why Is This Significant?

A rate cut could mean lower borrowing costs across the board, from businesses to homeowners.

For consumers, this may lead to reduced mortgage rates and more opportunities for loan refinancing. For the stock market, historically, rate cuts have triggered stock price hikes as companies benefit from lower borrowing expenses, while consumers increase spending. Moreover, this move could provide a cushion to the global economy, potentially calming market turbulence.

What the Experts Are Saying

Swapnil Aggarwal, Director at VSRK Capital, believes the Fed’s move could be either a cautious attempt to support a flagging economy or a strategic effort to spur growth amid mild inflation.

“If this cut is a reaction to concerns over economic deceleration or growing unemployment, the positive market response could be restrained,” Aggarwal remarked.

“However, if the Fed’s decision is driven by stable growth and subdued inflation, the market may react enthusiastically to the improved borrowing environment. All eyes are on the Fed as it steers through these challenging economic conditions,” he added.

Palka Arora Chopra of Master Capital Services noted that market sentiment has shifted from expecting no change to factoring in a 25 basis point reduction, driven by recent stock market dips and key economic indicators.

“If inflation is running below the Fed's target—usually set around 2%—a rate cut can help stimulate the economy, drive demand, and promote growth. However, persistently low inflation risks economic stagnation,” Chopra noted.

The Fed traditionally cuts rates in response to weakening economic indicators. A significant reduction of 50 basis points (0.50%) would be seen as a more forceful effort to stimulate the economy,” she added.

Market analyst Alex Volkov from VT Markets cited recent US inflation data showing a slight decline, which lends credence to expectations of a 25 basis point reduction. However, he raised concerns about whether a larger cut might be necessary. “If November only sees a 25 basis point cut, a follow-up 50 basis point cut is likely in December,” Volkov suggested.

Raj Patel, CMO at MintCFD, predicts a conservative 25 basis point cut rather than a bolder move. “A smaller cut of 25 bps could lead to a tepid market reaction. On the other hand, a 50 bps reduction might spark negative sentiment, signaling the Fed's serious concerns about an economic downturn,” Patel commented.

Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, echoed these views, adding that while rate cuts usually benefit markets, an overly aggressive cut might be seen as a red flag for deeper economic issues. The performance of banking stocks, along with the Fed’s statements, will play a key role in shaping market reactions.

As the Fed readies its announcement, investors will be keenly observing the impact on both global and domestic markets, including Dalal Street.

source – iindiatoday