'Rate cut in global markets means risk-on trade in emerging markets': How experts view Jerome Powell's 50 bps surprise

Federal Reserve Chairman Jerome Powell's announcement of a better-than-expected cut of 50 basis points (bps) in the benchmark US interest rates on September 18 has rekindled hopes of more frequent and steeper rate cuts in the coming months. With the latest revision in place, the US benchmark policy rates stand at 4.75-5.00 per cent. The rate cut in the US, the first such move in more than four years, comes at a time when investors around the globe keenly looked out for the onset of an impending easing of borrowing costs. 

What experts say

Madhavi Arora, Lead Economist, Emkay Global Financial Services: 

"This forceful move was characterised by Fed Chair Powell as a 'recalibration' to preserve the currently strong labour market from downside risks... Despite the outsized cut, Powell emphasised that the economy remains in good health, and that 50 bps is not going to be the pace of easing going ahead, with nine participants expecting one or no further cuts in 2024 (median projection of 50 bps further easing for 2024). The pace is thus in line with a soft landing scenario rather than a recession."

"The message that the Fed is recalibrating to a lower level of rates quickly without changing its baseline view for next year was reinforced by little change in the growth and inflation forecasts, and no change from the June forecast of 100 bps of easing in 2025."

"The contradiction between an outsized cut and a healthy economy proved tricky to justify, and markets are expecting much more easing than projected, with the UST curve bear-steepening on account of Powell’s pushback against larger cuts ahead... This start to the easing cycle provides some space to EMs to kick-start theirs too, but with low global volatility thus far, the RBI is likely to remain focused on domestic dynamics, with the first rate cut by December... A case for an early cut is still less likely, and we continue to see shallow cuts by both the Fed and RBI in this cycle."

Nilesh Shah, MD, Kotak Mahindra AMC: 

“The Fed opened the rate cut cycle with a bang with 50 bps cut in line with changed market expectations… From Inflation is transitory to higher rates for longer, the Fed has come a long way to meet market expectations."

“This rate cut will facilitate flows to the emerging market assets with wekaer dollar and lower rates."

Deepak Ramaraju, Senior Fund Manager, Shriram AMC: 

"Such high monetary correction (50 bps) was earlier undertaken only during the global financial crisis, indicating the severity of the economic stress the US is going through. Decadal high inflation and stressed labour market conditions were the preamble for such aggressive monetary correction. The main agenda was to prevent the economy from slipping into recession because of the 'higher for longer' strategy adopted by the Fed. The Street expectation was divided on the rate cut between 25 bps and 50 bps. It was a surprise element for a few market participants. With this cut, the Fed has to wait for the incoming macro data before taking the next monetary decision."

"It's likely that future rate cuts might be lower and spread out. This will continue to add to uncertainty in the equity markets. The equity markets reacted negatively and ended in the red. We can expect the broader emerging economies to undertake rate-cut decisions. On the domestic front, the RBI will focus on the data and might likely undertake a rate cut in December or 4Q FY25. The FII flows can be outbound in the short term and as the US dollar starts easing, the flows can come back into India. The markets are expected to remain in range with positively biased."

Neeraj Chadawar, Head of Fundamental and Quantitative Research, Axis Securities:

"The tone of the Fed was relatively positive for the current state of the US economy compared to earlier expectations of a 50 bps rate cut, which was anticipated to cause some pain in the US economy. However, the next 3-5 trading sessions remain critical in the global market, as we need to monitor any further signals of carry trade unwinding with this 50 bps rate cut move. Nonetheless, our market sees positivity today, as we entered this event with consolidation."

"A rate cut in the global markets means risk-on trade in emerging markets, and India would be the beneficiary."

Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities:

"The Fed's reduction has surprised the market. A vast majority of the market participants expected only 25 bps and were taken by surprise. Although the reaction to this development is somewhat lackluster as the markets ended the day with nominal gains after a volatile session. The Fed Chief downplayed the risk of an economic slowdown and maintained that a 50 bps cut was mainly done to support the labour market."

"It seems like the markets will take its time to digest this move of more than expected cut. Meanwhile we would recommend investors to focus on defensive sectors like FMCG & Pharma. Precious metals like gold and silver should also be added to the portfolio atleast till there is clarity on the market direction."

Vishal Goenka, Co-founder, IndiaBonds.com: 

“The Fed's historic rate cut was well priced in and US equities and bonds both were lower at the close of the day after initial rise. Fed Chairman Powell delivered a ‘hawkish’ cut as per market and mentioned that future course of action will remain data dependant."

"Interestingly there was a first time dissent vote since 2005 within the committee. The dot plots for future guidance remain less dovish than what the interest rate futures market are implying."

"There is diverse course for global central banks in this cycle with Brazil hiking rates and Bank of Japan following similar rate hike commentary. India has remain well insulated from rest of the world rate movements for now and the tremendous rally in risk assets plus projected economic growth keep an inflationary underlying force in the economy. The RBI's MPC meets next month and a rate cut may remain elusive for now, and perhaps not required yet, in India."

Sharad Chandra Shukla, Director, Mehta Equities: 

"The first rate cut after a long time was expected by the market for the last few months."

"Three cuts of 50 basis points in the next 12 months will trigger a feeling in the markets that recession fear is back."

"The Fed will have to take the forward path cautiously."

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