US Fed rate cut ahead: What does it mean for investors?

livemint.com:

upcoming interest rate cut by the US Federal Reserve has been a key talking point in the Indian stock market over the past few weeks. While discussions around Fed rate cuts have been recurring for over a year, it appears that the much-anticipated shift is finally on the horizon. The US Fed is poised to initiate its rate-cutting cycle, with the first reduction expected on 18 September, coinciding with the next Fed meeting.

For Indian investors, this decision holds significant implications. In financial markets, one principle remains largely consistent: interest rates and stock prices tend to move in opposite directions. When interest rates rise, stocks face downward pressure; when rates fall, stocks generally perform better.

The relationship, however, is nuanced. While the general rule holds true in most cases, there have been exceptions. The benchmark interest rate, often represented by the 10-year government bond yield, dictates the cost of borrowing across the economy—for individuals, businesses, and the government.

Higher interest rates typically curb borrowing and economic growth, while lower rates stimulate both, driving stock prices upward. Global financial markets, including India, have been pricing in an expected rate cut by the US Fed for some time. Following the pandemic, the Fed slashed rates to near-zero levels but later embarked on a rapid rate-hike cycle to rein in surging inflation.

Now, with inflation in the US easing and concerns about a slowing economy mounting, the Fed is preparing to reverse course. The market’s optimism hinges on what’s being termed a “soft landing"—a scenario where the Fed cuts rates, inflation continues to decline, and the US economy avoids a recession. This is the outcome