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US Federal Reserve opted for oversized rate cuts

ICICIdirect Research 20 Sep 2024 DISCLAIMER

US Federal Reserve surprised market by cutting interest rate by 0.5%, in its first rate cut since 2020. US Fed opted to lower borrowing cost to preserve the strength of the economy as risk to labor market mount.  Market is still expecting another 50-75 bps rate cut during the current calendar year suggesting at least 25bps cut in every meeting in coming months. Along with that policymakers see the Fed's benchmark rate falling full percentage point in 2025.

While Fed has revised down its projections for inflation and It expects core inflation to rise to 2.6% compared to June projections of 2.8%, unemployment rate is expected to rise at 4.4% by the year end than the current 4.2%. GDP growth is also projected lower at 2.0% in 2024 compared to June Projection of 2.1%.

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Dollar and Yields recovered after FOMC meeting as market was almost pricing the rate cuts as equities remained flat whereas Dollar recouped losses and moved back towards 100.90. Also, JPY depreciated against Dollar to move towards 143 once again. Recent appreciation in JPY has prompted the volatility to increase sharply across the asset classes. We believe that stability in JPY is important for volatility to remain lower in equities as well.

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