ET Explainer: How Fed’s more-than-expected rate cut will impact markets
Federal Reserve cut interest rates for the first time in more than four years citing lower inflation expectations and a slowing jobs market. A look at what it means for investors and Indian equities:
What is the significance of the Fed's interest rate cut?
<div data-placement=«Mid Article Thumbnails» data-target_type=«mix» data-mode=«thumbnails-mid» style=«min-height:400px; margin-bottom:12px;» class=«wdt-taboola» id=«taboola-mid-article-thumbnails-113507281»>The Fed's higher-than-expected rate cut of 50 basis points on Wednesday was the first since March 2020, marking the end of the central bank's monetary tightening cycle. It is also considered the start of the rate-easing cycle worldwide. The consensus on Wall Street is that the Fed may further reduce rates by another 50 basis points in two instalments of 25 basis points each in 2024. Though the American central bank's interest rate moves are entirely aimed at boosting its economy, they tend to have implications for economies, markets and assets worldwide.
What will be the impact of Fed rate cuts on various markets?
Interest rate cuts in the US tend to be most positive for riskier asset classes such as Asian and emerging markets equities including India. This is because when the Fed eases policy, the dollar tends to weaken against Asian currencies and the US bond yields fall. This is conducive for risky assets as a weaker dollar encourages foreign investors to pump money into markets with better returns and strengthening currencies. For instance, if the rupee firms up, it boosts the value of foreigners' Indian assets. In the past two years, a lot of foreigners have pulled money out of emerging markets on account of the stronger dollar with the interest rates in
