US Fed meeting: Rate cuts unlikely; can Powell's hawkish tone upset trend reversal buzz in Indian stock market?

US Fed meeting: Amid the raging war between Israel and Iran, investors are eyeing a key event — the outcome of the US Federal Open Market Committee (FOMC) meeting later on June 18.

Markets have largely priced in a status quo on interest rates from the Fed, even as inflation has cooled and the economy is showing signs of weakness. There is also pressure from President Trump to lower rates. However, a rate cut is unlikely at this juncture due to prevailing uncertainty over how US tariffs will impact the growth-inflation dynamics in the world’s largest economy.

The US headline consumer price index (CPI) for May increased at a softer-than-expected pace of 0.1 per cent month-on-month and was 2.4 per cent year-on-year. Core CPI increased 0.1 per cent month-on-month and 2.8 per cent year-on-year.

Fed rate cut may be far

The Fed is expected to stay in "wait-and-watch" mode because there is heightened uncertainty on what direction inflation will take in the coming months.

So far, Trump’s tariffs have not led to any significant rise in US inflation. However, some experts suggest it is too early to assess their full impact. They expect more visible signs of rising inflation in the second half of the year, once the US concludes negotiations and the tariffs take effect in their final form.

According to Madhavi Arora, Lead Economist at Emkay Global Financial Services, the market continues to price in two Fed cuts in 2025, but the probability of a cut in June is zero. The next cut is expected in October.

"While the CPI print is somewhat reassuring, there remains very little signal in the data, with firms continuing to manage tariffs for now – tariffs will likely only show up in the data (either through higher inflation or lower profit margins) a few months down the line. In such a scenario, the Fed will remain in wait-and-watch mode," said Arora.

"The market is discounting two possible rate reductions by 25 bps this year, the first one most likely in Sept’25. The oil price trajectory is yet to be seen, given the ongoing tussle between Israel and Iran. Amid such uncertainty, the Fed is likely to leave the policy rate unchanged, waiting for more information and clarity," said Sankhanath Bandyopadhyay, Economist at Infomerics Valuation and Ratings Ltd.

Can Powell upset the Indian stock market?

More than the Fed's policy decision, investors are focused on the Fed's "dot plot" and Chair Jerome Powell's comments on the evolving trends of economic growth and inflation.

Experts believe Powell's hawkish tone may weigh on the domestic market, which is trying to shrug off geopolitical headwinds.

Market participants are clinging to hopes that the Fed will ultimately cut rates this time and that the Israel-Iran war will not drag on for long.

"The market has priced in that the Fed will not cut rates this time. A rate cut is expected later in the year. Powell’s hawkish comments may have some short-term impact, and there could be some foreign capital outflow due to a strengthening dollar. However, a prolonged downtrend is unlikely," said G Chokkalingam, the founder and head of research at Equinomics Research Private Limited.

"We believe the Fed is going to keep the interest rates unchanged. However, given inflation is still above the Fed’s 2 per cent level, Powell might give direction for the future. We don’t think there’ll be much impact of the Fed’s announcement on the Indian markets," said Shruti Jain, Chief Strategy Officer, Arihant Capital Markets.

Bandyopadhyay highlighted that the yield gap between India's 10-year government bond and the US 10-year treasury note has narrowed significantly, downsizing the incentives for foreign investors to invest in Indian bonds. Hence, there might be certain FII outflows in the near term, or volatility may persist for some time.

Bandyopadhyay believes such outflows, oil price trend, and future trend of the US dollar index may weaken the rupee to some extent, which also may prompt further RBI market intervention. The stock market also may remain subdued for a while, depending on such developments.

However, the domestic market's macro fundamentals are well-placed and suggest it could see healthy gains in the medium to long term.

The Indian economy is expected to grow at a rate of over 6 per cent in FY26. The monsoon is expected to remain above normal this year, and earnings are also projected to improve further from Q1FY26.

A major risk is crude oil prices. If oil rises to around $100 per barrel, it could distort India’s fiscal math and raise inflationary pressures, potentially triggering a sharp correction in the domestic market.

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Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions, as market conditions can change rapidly, and circumstances may vary.