US FOMC Meet Begins Today: What To Expect?
The global financial community is keenly watching the Federal Open Market Committee (FOMC) meeting that commenced on September 17. This meeting, the first in over four years to propose a rate cut, could have significant implications for markets worldwide. The eagerly awaited rate decision will be announced by Fed Chair Jerome Powell on September 18 at 11:30 PM IST.
Current Interest Rate Status
For 14 months, the benchmark lending rate has remained at a 20-year high of between 5.25% to 5.50%. However, given the Federal Reserve's shift in focus towards achieving a 2% inflation target, market participants are anticipating a change. This would be the first adjustment since the rate was drastically cut in March 2020 to support the U.S. economy amidst the COVID-19 pandemic.
Market Expectations and Predictions
Following Powell's remarks at Jackson Hole, the consensus leans towards a quarter percentage point cut, though some speculate a possible half-point reduction. The Fed Funds futures indicate an even split on whether the cut will be 25 or 50 basis points. This comes as recent data shows a core inflation increase of 0.3% in August, primarily driven by rising housing costs, signalling that the Fed's battle with inflation is ongoing.
Impact on Financial Markets and Bond Yields
The prospect of a rate cut has slightly uplifted the S&P 500, showing about a 1.5% increase over the past month. More dramatic movements were observed in the bond market, where the yield on U.S. 2-year Treasury notes dropped significantly from 4.8% in July to 3.6%. Similarly, the yield on 10-year Treasury notes also saw a sharp decline.
The potential rate cuts and falling bond yields have softened the U.S. dollar, sparking renewed investment into emerging markets. According to fund tracker EPFR, the week ending September 11 witnessed the 15th consecutive inflow into Emerging Markets Equity Funds. Additionally, in anticipation of upcoming central bank meetings, investors have shifted $30 billion into money market mutual funds.
Post-Federal Reserve decision, with lower returns from fixed income, this capital is expected to flow into equities. Moreover, if the Fed is concerned about a potential slowdown in the U.S. economy, it would avoid destabilizing the markets, as it would rely on the wealth effect to support the economy.
Implications for Indian Markets
The markets have already priced in a series of rate cuts, now shifting their attention to new challenges such as the economic slowdown typically seen after each cycle. The strategic announcements from the Fed Chair are likely to have widespread repercussions, influencing financial markets globally, including India.
Historically, lower interest rates in the U.S. have boosted the appeal of emerging markets by lowering the yields on U.S. bonds. In the context of the Indian markets, there has been a noticeable uptick in net foreign portfolio inflows into Indian equities — a trend that is likely to continue. With its strong GDP growth, stable political environment, and increasing domestic consumption, India continues to be an attractive destination for these capital flows.
Key Things to Watch & Investment Strategies
The Federal Reserve's approach to rate cuts is poised to heavily influence market behaviour. A jumbo rate cut could trigger inflation concerns, while reluctance to lower rates may impede economic progress. Consequently, Powell’s press conference on September 18 is expected to be crucial, potentially steering market trends.
For Indian investors, the "buy on dips" strategy has proven effective in the ongoing bull market. However, with the current lack of valuation comfort in the broader market, focusing on quality large caps may offer a safer avenue for long-term investment. For short-term traders, keep your positions light and adaptable, responding to market signals rather than attempting to predict market movements, which can be fraught with risk.
Stay updated with our latest blog posts and expert insights on the Liquide App. Download now from Google Play Store and Apple App Store to access real-time market analysis and recommendations tailored to enhance your investment strategy.