US Fed meet in focus: What does the Indian stock market expect from the US central bank?

US Fed meet in focus: While the expectations are rife that the US Federal Reserve will embark on its rate-cutting cycle in September, and the July policy meeting could be a non-event for the global markets, investors are keen to pick signals from the Fed on monetary policy easing.

The US Fed meeting will start on Tuesday, July 30, and conclude on July 31.

Given the positive cues emanating from the US on the economic front, all eyes are on the US Federal Reserve meeting, starting tomorrow. Indian stock market, which has been on a high-hitting spree of late, expects signals from the Fed that rate cuts are not very far.

The US Fed has been on a pause since July last year when it raised rates last time by 25 bps. At present, the policy rate is in the 5.25-5.50 per cent range.

Since last July, the stock markets in the US and India have gained significantly. Experts believe a rate cut of 25 bps may not significantly impact the market, but a surprise cut this week may give a fresh boost.

"The market always discounts events in advance. Normally, rising interest rates are considered negative for the stock market, but the US markets hit all-time highs when interest rates were increased by 500 bps. This is because the market discounted the possibility that the rate hikes would end soon and the reversal would happen," said G. Chokkalingam, the founder and head of research at Equinomics Research Private Ltd.

"When the actual reversal happens, it may not impact the market much. But if, by any chance, a rate cut happens this week only, then it might boost the market because the market expects rate cuts in September and not in July. A surprise 25 bps cut in July is beyond expectation," Chokkalingam said.

Inflation has been easing in the US but remains above the Fed's 2 per cent target. The personal consumption expenditures (PCE) price index inched up 0.1 per cent in June. Year-over-year, it increases at a rate of 2.5 per cent after witnessing a rise of 2.6 per cent in May.

Sandeep Raina, Executive Vice President-Research, Nuvama Professional Clients Group, pointed out that the Fed’s preferred gauge on inflation, i.e., the PCE index, has been showing a marked improvement in the past two months, providing some comfort.

"While The Federal Reserve is still expected to leave monetary policy unchanged in the upcoming FOMC meeting, we believe they might hint at considering an interest rate cut, most probably at the subsequent September FOMC meeting. With subsiding inflationary pressures and easing labour market conditions, the financial markets are also pricing in rate cuts starting September 2024," said Raina.

The Fed will also consider labour market trends and the current status of the US economy when deciding on the rate cuts.

According to data released by the US Bureau of Economic Analysis, the US real gross domestic product (GDP) increased by 2.8 per cent for the April to June quarter of the financial year 2024-25. The current dollar GDP increased by 5.2 per cent annually, or $360 billion in the second quarter to $28.63 trillion.

As the US economy remains strong, the Fed may remain comfortable in keeping rates higher for a longer period.

Fed Chair Jerome Powell has been reiterating that the US central bank will not make haste in cutting rates. In his testimony to Congress in mid-July, Powell stated that the central bank wants to be confident that inflation is easing sustainably before cutting rates.

Sujan Hajra, Chief Economist & Executive Director at Anand Rathi Shares and Stock Brokers, observed that the Federal Reserve is focused on maintaining a delicate balance between controlling inflation and fostering economic growth, aiming for a smooth transition without triggering a significant economic downturn.

Hajra pointed out that despite a slight moderation, inflation remains above the Fed's 2 per cent target, prompting a cautious stance.

"The Fed's current hawkish position indicates that rate cuts will only be considered with clear evidence of sustained progress towards the inflation target. Consequently, we anticipate that the Federal Reserve will maintain the current interest rates at their existing levels in July 2024," Hajra said.

Aamar Deo Singh, Senior Vice President of Research at Angel One, pointed out that with US inflation moderating in the second quarter and softening job market, this could trigger a rate cut as early as September. Hence, market participants shall look for signals this week about the timelines for rate cuts.

"The markets will appreciate any rate cut, but the US Fed's commentary on the future economic outlook holds equal importance. Hence, investors need to be cautious, as we could witness a spike in volatility this week," said Singh.

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