If Fed starts cutting rates from September, will it have a multiplier effect on stock markets?

Notwithstanding the 17% surge seen in Sensex and Nifty so far in the calendar year, Fed’s expected rate cut in September can still have a multiplier effect on the stock market.

The Fed move of holding rates steady on Wednesday night and strong hints of a first cut in September unleashed animal spirits in global bond and equity markets. While Nasdaq ended 2.64% higher, Nifty topped 25,000-milestone for the first time and Sensex rallied beyond Mt 82K.

“US 10-year bond yields, which are inversely correlated to bond prices, slipped sharply lower and are on the verge of falling below 4% mark. This is a big positive for the markets as the cost of capital for corporates and consumers is falling. Riskier assets like emerging markets and metals are likely to do well,” said Apurva Sheth of SAMCO Securities.

Precious metals like gold and silver are also likely to benefit from rate cuts.

CME FedWatch tool shows that traders are pricing in 100% probability of a rate cut for Fed’s 18th September meeting as Jerome Powell clearly stated that if inflation remains on the anticipated trajectory of 2%, a rate cut might happen as early as September.While acknowledging that job gains have moderated, the FOMC said it is attentive to the risks to both sides of its dual mandate and needs greater confidence that inflation is moving towards 2% before cutting rates.With inflation cooling off and job growth slowing down, the Fed would begin to dial down the tightening done over the last 2 years in the September 2024 policy and assist in the soft landing of the economy, analysts say.”With the likely timing and size of the first cut well communicated, the tougher question becomes the pace of cuts thereafter. Of course, Powell cannot answer that question directly, but his answer to a related question indicates that the pace of labor market cooling is at the front and center in his thinking about pace – stating “we’re seeing just normalization of the labor market or something more.

“The first cut in September looks to be a reality now, followed by quarterly cuts ahead, unless the unemployment situation deteriorates faster for a faster pace of cuts,” said Emkay Global’s Madhavi Arora.

Fed’s decision to keep interest rates steady at 5.25%-5.50% for the eighth consecutive time suggests that the central bank is preparing to support economic growth with potential rate reductions.

“Market reactions have been favourable and are anticipating that the Fed will initiate two rate cuts, starting with the September meeting,” said Raghvendra Nath, MD, Ladderup Wealth Management.