Global markets want the US Fed to go fast and furious on rate cuts

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Subscribe to enjoy similar stories. In a bold move, the US Federal Reserve kick-started its monetary policy easing cycle with a 50 basis point (bps) interest rate cut, bringing the Fed funds target range to 4.75-5%. The market was widely anticipating a 25 bps rate cut (one basis point is 0.01%).

While delivering this surprise, Fed chair Jerome Powell emphasized that the decision was a recalibration of policy aimed at maintaining the strength of the US economy and its labour market. He indicated that the Fed’s move should be viewed as a one-off, rather than the start of a series of large rate cuts. Future interest rate decisions will be made on a meeting-by-meeting basis, guided by incoming economic data.

But the market is gunning for an increased pace of rate cuts. “The central bank suggests a further 50 bps of cuts this year with 100 bps more in 2025 and 50 bps in 2026, taking the policy rate down to the 2.75-3% range. The market, though, thinks it will end up going harder and faster with a 2.9% Fed funds rate priced a full 12 months ahead of when the Fed thinks it will happen," ING, a Dutch financial services firm, said in note.

A faster-than-anticipated rise in US unemployment rate due to muted hiring intentions of companies could be a key force that could push the Fed to deliver outsized interest rate cuts. US hiring remained tepid in August even as the unemployment rate edged lower, showed latest official data. “So while Powell and the statement described risks as balanced, we think they are more concerned about downside risks to the labour market than upside risks to inflation.