US Federal Reserve Cuts Interest Rates: What This Means for You

US Federal Reserve Rate Cut: Third Time This Year

The US Federal Reserve, led by Chairman Jerome Powell, has cut its benchmark interest rates for the third consecutive time. This decision, made on December 10, lowers the federal funds rate to a range of 3.50%–3.75%, the lowest level since 2022. The rate cut is part of the Fed's efforts to support the US economy, which has shown signs of slowing growth and elevated inflation.

Divided Decision

The decision to cut rates was not unanimous, with nine out of 12 committee members voting in favor and one member advocating for a more significant rate cut of 50 basis points. Additionally, only four policymakers predict a single rate cut next year, while another four expect two cuts, and four others anticipate more cuts, indicating uncertainty about the future of monetary policy.

Impact on the US Economy

The US economy has experienced slower job growth and a slight increase in the unemployment rate. However, more recent indicators suggest that the economy is still expanding, albeit at a slower pace. The Fed has also noted that inflation has moved up since earlier in the year, remaining somewhat elevated. The central bank will continue to monitor incoming data to determine its future policy path.

Expert Insights

According to Jeffrey Roach, Chief Economist for LPL Financial, the Fed is relying on higher productivity to support stronger growth, despite slower job creation. Roach expects the Fed to remain on hold in Q1 and potentially cut rates again in Q2. Other experts, like Charlie Ripley, Senior Investment Strategist for Allianz Investment Management, believe that this could be the end of the monetary easing cycle in the US, given the divided decision and the challenging balance between supporting growth and controlling inflation.

Implications for the Indian Stock Market

The Indian stock market is unlikely to react significantly to the Fed's decision, as the policy move was expected and the Fed has sent mixed signals about its future interest rate trajectory. The domestic market is currently facing liquidity issues due to a surge in initial public offerings (IPOs). A dovish Fed, which is more inclined to cut rates, typically leads to a weaker US dollar and lower benchmark bond yields, making emerging markets like India more attractive to foreign investors.

Market Reactions

Following the Fed's decision, the US dollar index dropped 0.25% to 98.54, while US 10-year bond yields remained largely flat. This could lead to a mild reaction in the Indian stock market, with some experts predicting a nominal impact due to the current domestic challenges, including relentless foreign institutional investor (FII) selling and weak corporate earnings.

The US Fed's decision will likely have a muted impact on the Indian stock market, which is more focused on domestic earnings, growth trends, and developments like the US-India trade deal. As VK Vijayakumar, Chief Investment Strategist at Geojit Investments, noted, the dot plot suggests one more rate cut in 2026 and another in 2027, but the actual path may change depending on economic conditions.

• The US Federal Reserve cut its benchmark interest rates for the third consecutive time.
• The federal funds rate now ranges from 3.50% to 3.75%, the lowest level since 2022.
• The decision was made to support the US economy, which has shown signs of slowing growth and elevated inflation.
• The Indian stock market is unlikely to react significantly to the Fed's decision due to current domestic challenges.
• The Fed's future policy path will rely on incoming data, and the central bank may cut rates again in the future.