U.S. Federal Reserve has reduced interest rates by 25 basis points (0.25%), bringing them down to a range of 4.25% to 4.50%. This marks a total of 100 basis points in cuts for 2024. Cleveland Fed President Beth Hammack disagreed with the decision. The Fed’s median forecast expects 50 basis points of cuts in 2025. Inflation projections for 2025 have increased from 2.1% to 2.5%, with unemployment expected to rise to 4.3%. One Fed official predicts no rate cuts in 2025.
Fed Chair Jerome Powell explained that inflation is now closer to the Fed’s target of 2%. Housing market activity is still weak, and wage growth has slowed. The labor market is no longer driving inflation. Powell emphasized that the Fed will take a cautious approach in lowering interest rates and that inflation expectations are stable. He also mentioned that the Fed’s decision to change rates is currently on hold.
Powell stated that while inflation risks are balanced, the Fed is closely watching both positive and negative risks. The Fed is shifting toward a more neutral policy, meaning it is no longer as restrictive. The Fed can be more cautious with rate cuts but will not follow a strict plan. Reducing rates too slowly could hurt the economy and job market. The Fed expects higher rates next year due to ongoing inflation concerns, but it will adjust based on economic conditions and may act faster if inflation or the labor market weaken unexpectedly. Inflation is generally on track, with housing services costs decreasing. Job creation is slowing down but still remains below what is needed to keep unemployment steady.
Powell added that the Fed’s policy stance is now much less restrictive, with stronger economic growth and lower unemployment slowing down the pace of rate cuts. The Fed is near a neutral stance but remains cautious due to the risk of persistent inflation. Future rate cuts will depend on how the economy performs.
Powell also addressed the potential effects of new policies, such as tariffs, on inflation. The Fed is still studying how tariffs might impact inflation and is cautious about making predictions. The impacts of tariffs on inflation are uncertain, with many factors at play, such as which countries and goods are affected. The lessons from 2018 may not be applicable to current circumstances, so the Fed is continuing to research this issue.
Powell expressed confidence in the U.S. economy’s strength, stating there is no reason to expect a downturn beyond the usual expectations. He reiterated that restrictive policies are necessary to bring inflation to 2%, and he is optimistic about reaching that goal. Housing inflation is falling steadily, and goods inflation has returned to pre-pandemic levels. The trend of declining inflation remains intact, and the job market has cooled significantly. While inflation is still recovering from the shocks of 2021 and 2022, Powell is confident that the U.S. will achieve the 2% inflation target, though it may take another year or two.
In the bond market, the U.S. Treasury 10-Year Yield is set to experience its largest daily increase since November 12. The Two-Year Yield has risen by 10.7 basis points, marking its biggest gain in over two months. Meanwhile, the Five-Year Yield has reached its highest level since early July, up 13.5 basis points at 4.384%.
Sensex Drops 1000 Points, Nifty Falls 1% Amid Fed Decision
Sensex dropped nearly 1000 points, trading at 79,278, and the Nifty fell around 1% to 23,950 at 11:25 a.m. due to the US Federal Reserve’s interest rate decision. In the first half of trading, Rs 3.76 lakh crore in market capitalization was lost.
Domestic indices opened lower on December 19, with the Sensex down by 717.57 points to 79,464.63, and the Nifty down by 217.10 points to 23,981.75. Most sectoral indices were in the red, with the Nifty IT, Nifty Auto, and Bank Nifty falling nearly 2%, while the Nifty Pharma Index rose by 1%.
Foreign institutional investors (FIIs) have sold Rs 8,000 crore worth of stocks over the last three sessions, raising concerns about further sell-offs. So far this year, FIIs have sold Rs 2.94 lakh crore in shares.
In 2024, domestic institutional investors (DIIs) made record net purchases of ₹5 lakh crore, up from ₹2.76 lakh crore in 2022 and ₹1.81 lakh crore in 2023, with the ₹5 lakh crore milestone reached in just 45 sessions.
Indian rupee dropped to a record low of 85.0663 per dollar, following weak Asian currencies and hawkish Fed signals. Bond yields rose by 3 basis points to 6.78%, and the Nifty 50 fell by 0.6%.
