Mumbai: The US Federal Reserve on Wednesday cut interest rates by a quarter point and signalled a slower pace of cuts in 2025, triggering a sharp sell-off in the global financial markets including India where Nifty 50 tanked more than 1.33 percent or 321 points to open at 23,877.15 points, while the BSE Sensex was down by 1,153.17 points or 1.44 percent to open at 79,029.03 points.
The rupee also dropped 12 paise to an all-time low of 85.06 against the US dollar in early trade on Thursday, as the hawkish tilt from the US Federal Reserve sparked a broad dollar rally.
Apart from India, other Asian markets also fell, with Tokyo, Hong Kong, Shanghai, Sydney, Seoul, Taipei, Bangkok, Singapore, Wellington, Manila and Jakarta all well down.
A hawkish cut
Jack McIntyre, a portfolio manager at Brandywine Global, said the rate cut had already been priced in by markets but "when you include the forward guidance components, it was a hawkish cut".
"Stronger expected growth married with higher anticipated inflation -- it's no wonder the Fed reduced the number of expected rate cuts in 2025. "The results of this meeting raise the question: if the market wasn't expecting a rate cut today, would the Fed actually have delivered one? I suspect not.
"The Fed has entered a new phase of monetary policy, the pause phase. The longer it persists, the more likely the markets will have to equally price a rate hike versus a rate cut. Policy uncertainty will make for more volatile financial markets in 2025."
All about the rate cut
Policymakers voted 11-to-1 to lower the central bank's key lending rate to between 4.25 percent and 4.50 percent as expected, the Fed announced in a statement. But they also halved the number of quarter-point cuts they expect next year, from an average of four back in September to just two on Wednesday, catching the markets by surprise.
US stocks tumbled to one of their worst days of the year after the Federal Reserve announcement that it may deliver fewer shots of adrenaline for the US economy in 2025 than earlier thought.
The S&P 500 fell 2.9%, just shy of its biggest loss for the year, to pull further from its all-time high set a couple weeks ago. The Dow Jones Industrial Average lost 1,123 points, or 2.6%, and the Nasdaq composite dropped 3.6%.
The Fed said it’s cutting its main interest rate for a third time this year, continuing the sharp turnaround begun in September when it started lowering rates from a two-decade high to support the job market.
Wall Street loves easier interest rates, but that cut was already widely expected. The bigger question centres on how much more the Fed will cut next year. A lot is riding on it, particularly after expectations for a series of cuts in 2025 helped the US stock market set an all-time high 57 times so far in 2024. All three major indices on Wall Street finished firmly lower, while the yields on US Treasurys surged as traders digested the prospect of higher interest rates over the next couple of years.
While inflation has "eased significantly," the level remains "somewhat elevated" compared to the Fed's long-term target of two percent, Chair Jerome Powell told reporters on Wednesday. He said he remained "very optimistic" about the state of the US economy, adding that the Fed was now "significantly closer" to the end of its current easing cycle.
It was the final planned rate decision before outgoing Democratic President Joe Biden makes way for Republican Donald Trump, whose economic proposals include tariff hikes and the mass deportation of millions of undocumented workers. The non-partisan Congressional Budget Office (CBO) estimates that imposing fresh tariffs would cut economic growth and push up inflation.
Following Trump's victory in November's election, some analysts had already pared back the number of rate cuts they expected in 2025, warning that the Fed may be forced to keep rates higher for longer.
Inflation battle not over
The Fed has made progress tackling inflation through interest rate hikes in the last two years without dealing a knockout blow to either growth or unemployment and recently began cutting rates to boost demand in the economy and support the labour market. But in past months, the Fed's favoured inflation measure has ticked higher, moving away from the bank's target and raising concerns that the inflation fight is not over.
Members of the Fed's rate-setting Federal Open Market Committee (FOMC) now "need to see additional improvements in inflation to continue to cut rates -- full stop," KPMG chief economist Diane Swonk wrote in a note published after the decision. (Agency inputs)
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