WASHINGTON, Sept 18: The Federal Reserve on Wednesday announced its first interest
rate cut of the year, lowering the rate by a quarter-point to a new range of
4.00% to 4.25%.
The financial markets responded with a blend of optimism and caution. Reacting
to the rate cut, gold briefly surged to a record high of $3,707.57/oz before
settling at $3,662. Gold remained a favoured hedge while it was a mixed reaction
on equities. The Dow Jones rose 0.8%, S&P slipped 0.2% and Nasdaq dropped 0.7%.
Indian stock market benchmark indices rallied: Sensex gained 313 points and
Nifty rose 91 points. But US Treasury yields fell below 4%.
President Donald Trump had criticized the Fed Chair Jerome Powell for not cutting
interest rates in recent weeks, calling for his "termination." But Federal Reserve,
however, is an independent agency.
Following the Fed’s decision to cut interest rates, Trump appeared to temper
his long-standing criticism of Powell. Now he wants Powell to do more, to “do
the right thing” going forward, but Powell, however, remained firm in defending
the Fed’s independence, stating that “there was no widespread support at all”
for a more aggressive move and emphasizing the committee’s data-driven approach.
The cut follows the central bank prioritising the labour market—what Trump
wanted—alongwith a persistent, elevated inflation.
The Fed Chair told a press conference that the action was a "risk management"
cut. He noted that recent economic indicators suggest growth has moderated—slowed
down from a faster rate—and the job gains too are also pacing down.
The concern for the labour market's health has prompted the Fed to shift its
focus from a strict anti-inflationary stance to also include a mandate of achieving
maximum employment, retaining the focus and priority to stabilise the rising
prices.
Powell said, tariffs "may" be contributing to the slowdown in the job market.
But he says the bigger driving force is slowing immigration rates.
He said President Trump's tariffs are beginning to push up some prices - but
the "overall effects on economic activity and inflation remain to be seen."
On the jobs market, he said lower immigration, not tariffs, are having a bigger
impact: "There's very little growth, if any, in the supply of workers"
The official Fed statement said, "Job gains have slowed, and the unemployment
rate has edged up but remains low. Inflation has moved up and remains somewhat
elevated."
Sectoral impact
The implications of this rate cut are expected to ripple across the US economy,
impacting both consumers and businesses. For borrowers, a lower benchmark rate
typically translates to cheaper financing for mortgages, car loans, and business
expansion. While some of the effect on long-term rates has already been "priced
in" by the market, analysts expect continued relief for households and companies
looking to refinance debt or secure new credit. However, the benefits for savers
and those with high-yield savings accounts may be less appealing as yields on
these products are likely to decline.
Financial markets have shown a mixed but generally positive reaction. The rate
cut and the possibility of further easing have bolstered sentiment in global
equities, with major indices rallying on the news.
The stock market's reaction, while positive, was also influenced by the Fed's
projections, which signal two more potential rate cuts this year and one in
2026. This forward guidance provides a clearer, though not guaranteed, path
for future monetary policy. The US dollar, on the other hand, saw fluctuations,
and bond yields moved in anticipation of the cheaper borrowing costs.
Looking ahead, the Fed's path remains data-dependent and uncertain. The central
bank faces the challenging task of managing two opposing forces: a slowing labor
market and stubborn inflation, which remains above the Fed’s 2% target. The
outcome will depend heavily on incoming economic data and how effectively the
rate cut stimulates hiring without reigniting a broader inflationary surge.
Experts explain the metrics of rate cut
A Federal Reserve (Fed) rate cut is a move by the central bank to lower its
benchmark interest rate, known as the federal funds rate. This action is a key
tool of monetary policy and is typically implemented to stimulate economic growth.
The impact of a Fed rate cut is widespread, affecting everything from consumer
and business borrowing to the stock market and global economies.
Stimulating growth: The primary goal of a rate cut is to encourage economic
activity. By lowering the cost of borrowing for banks, the Fed makes it cheaper
for them to lend money to businesses and consumers. This can lead to increased
investment, expansion, and hiring by businesses, and more spending by consumers.
Business lending: For businesses, a lower interest rate environment
means that it's more affordable to take on debt for various purposes, such as
buying new equipment, building new facilities, or funding operations. This can
lead to increased profitability and growth.
Labour market: Rate cuts are often a response to a weakening labor market.
By stimulating economic activity, the Fed hopes to encourage job growth and
keep unemployment rates from rising.
Borrowing costs: The most direct impact for consumers is on the cost
of borrowing. A rate cut can lead to lower interest rates on various loans,
including:
Variable-rate loans: Interest rates on credit cards and home equity
lines of credit (HELOCs) are often tied to the prime rate, which moves in tandem
with the federal funds rate.
Mortgages: While not directly tied to the Fed rate, mortgage rates are
influenced by the bond market, which can react to rate cuts. A Fed rate cut
can contribute to a trend of slowly decreasing mortgage rates over time, making
homeownership more affordable or encouraging refinancing for existing homeowners.
Auto loans and personal loans: While not as directly impacted as other
forms of debt, the cost of these loans can also gradually decline.
Savings and Investments: The flip side of lower borrowing costs is that
savers may earn less interest on their deposits. Banks often reduce the interest
rates on savings accounts, money market accounts, and certificates of deposit
(CDs) after a Fed rate cut.
Impact on the tock market and investments:
Stock Market: The stock market often reacts positively to a rate cut.
The anticipation of lower borrowing costs and a stimulated economy can lead
to increased investor confidence. Lower interest rates can make stocks more
attractive compared to bonds, which may offer lower yields. This can drive up
stock prices, especially for growth stocks that are valued based on future earnings.
However, the market's reaction can be mixed if the rate cut signals concerns
about a slowing economy.
Bonds: Bond prices and yields have an inverse relationship. When interest
rates are cut, the yields on newly issued bonds will fall, which can make existing
bonds with higher yields more valuable.
Gold: Gold, often seen as a safe-haven asset, can become more attractive
to investors when interest rates are lower. Lower yields on bonds and a potentially
weaker dollar can make gold a more appealing investment, which may lead to an
increase in its price.
Foreign Investment: A rate cut in the US can make American bonds less
appealing to foreign investors. This can encourage them to shift funds to emerging
markets, like India, which may offer better returns. This influx of foreign
capital can be a positive for those markets.
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