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The US Federal Reserve has reduced interest rates by 50 basis points to 4.75-5%, the first rate cut in four years. This decision impacts global markets, including gold prices and Indian shares.
On Wednesday, the US Federal Reserve made a notable move by cutting its key interest rates by 50 basis points, bringing the rates down to 4.75-5%. This marks the first rate cut in over four years and follows a period of aggressive rate hikes aimed at controlling inflation, which had reached multi-decade highs during the global pandemic and geopolitical tensions.
The Federal Open Market Committee (FOMC), the rate-setting authority in the United States, concluded its two-day meeting on Wednesday, announcing the much-anticipated rate cut. This marks a clear shift in US monetary policy after a prolonged phase of rate hikes between March 2022 and July 2023, during which the Fed increased rates by a cumulative 525 basis points. These hikes were part of efforts to tame inflationary pressures that escalated in the wake of the Russia-Ukraine war and the COVID-19 pandemic.
Fed Chair Jerome Powell, in his post-meeting remarks, stated that while the US economy remains robust overall, there has been a cooling of the labor market and a notable easing in inflation. The decision to cut rates, therefore, reflects the Fed's assessment that inflationary pressures are subsiding, making room for monetary easing.
The rate cut is likely just the beginning of a series of reductions expected over the coming years. According to the Fed’s projections, two additional 25 basis point cuts are anticipated in 2024, bringing the interest rate down further. In 2025, the Fed foresees an additional 100 basis points in rate cuts, with a further 50 basis points expected in 2026.
The last time the US central bank cut interest rates was on March 15, 2020, at the height of the pandemic-induced economic turmoil. Since then, rates have remained steady for the past 11 consecutive months, starting in July 2023. This steady hold was in stark contrast to the aggressive hikes aimed at reining in inflation.
The ripple effects of the Fed’s decision are expected to be felt globally. In the immediate term, US businesses and consumers are likely to benefit from lower borrowing costs on mortgages, auto loans, and credit cards. Businesses may see reduced costs on loans, spurring spending and, potentially, boosting stock prices. In the longer term, this could translate to improved economic growth, both in the US and in markets such as India.
For Indian markets, the medium to long-term outlook remains positive. A growing US economy generally has a favorable impact on global trade, and this could trickle down to sectors of the Indian economy as well. Stock prices, particularly in sectors with heavy exposure to global markets, could see gains.
Historically, rate cuts tend to buoy gold prices, and this recent Fed decision is expected to have a similar effect. Gold prices often rise when interest rates fall because lower rates reduce the opportunity cost of holding non-yielding assets like gold. In addition, rate cuts can weaken the US dollar, which typically supports higher gold prices.
Currently, gold is already hovering near all-time highs in the international market, driven by a combination of geopolitical tensions, a pessimistic global growth outlook, and now the US rate cut. However, it’s important to note that gold prices can be influenced by a wide range of factors beyond just US monetary policy, so price movements may still be volatile.
The Fed's policy outcome is also expected to keep volatility high in the Indian stock market. The Nifty need a sustained closing above 25500-25600 for opening further upside towards 25,800 in the coming weeks being the measuring implication of the recent range breakout (25300-24800).
However, failure to break above the resistance may result in continued consolidation, with the Nifty moving between 25,000 and 25,500. In this scenario, stock-specific action will likely drive market sentiment. Key support levels to watch are at 25,100 to 25,000, bolstered by the confluence of the 20-day Exponential Moving Average (EMA) and a rising trendline that has been in place for the past two months.
The US Federal Reserve's decision to cut interest rates by 50 basis points marks a significant shift in global monetary policy. While this move is expected to reduce borrowing costs and potentially boost economic growth, the impact on markets, especially in sectors like gold and equities, will depend on a range of factors, including geopolitical developments and overall economic conditions. For Indian investors, staying vigilant and watching key market indicators will be crucial in navigating the upcoming period of market volatility.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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