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Below the Quote on US Fed Rate Decision: 25 bps Rate Cut, Future Rate Projections Unchanged byby Ankita Pathak, Ionic Wealth by Ankita Pathak, Ionic Wealth

In a much-anticipated move, the FOMC voted with 9:3 majority for a 25-bps rate cut, bringing the federal funds rate range to 3.50-3.75% on the back of increased downside risks to employment. So far, the FOMC has delivered a cumulative 175 bps of rate cut since September 2024. Though the upside risks to inflation still remain, largely due to higher tariffs, these shifts are expected to be short-lived, thereby emphasizing more on labour markets. In addition to a rate cut, the Fed also decided to start buying short-term treasury securities (mainly treasury bills), in order to stabilize money markets and to maintain ample supply of reserves over time.

Precedence to labour market over still somewhat elevated inflation

Labour market conditions continue to show signs of softness, with job gains slowing and the unemployment rate rising noticeably from the last year. While reduced immigration and lower labourforce participation may be adding some strain, labour demand has clearly moderated. Overall economic growth remains moderate with pockets of stress seen in sectors like housing, while consumer spending and business fixed investment remain solid.

Inflation in the US remains above the 2% target, as higher tariffs have pushed up prices in goods, even as disinflation in services continues.

Fed to buy treasury bills to stabilize money markets In the first month amount will be USD 40 Bn. The amount may remain elevated for a few months and thereafter reduce.

Dot plot projections for future cuts remain unchanged

The Fed expects some improvement in GDP in 2025 from 1.6% projected earlier to now 1.7%. Also, growth projections for the next three years were revised upwards. Inflation on the other hand, was revised a tad lower for this year to 2.9% from 3.0% and also for the next year. The Fed expects 25 bps cut each in 2026 and 2027, unchanged from earlier projections.

Positive reaction from equity & bond market

The broader market index- S&P 500 closed 0.68% higher and 10Y closed ~5 bps lower. DXY noted a marginal decline and closed 0.4% lower.

Ionic Wealth View

The rate decision was on expected lines, but divided votes within the committee hints of a potentially tricky path ahead. Although, what could matter even more now is who steps in as the next Chair of the US Fed. With President Trump likely to favour a candidate inclined towards deeper rate cuts, the market could be staring at a more dovish tilt in the months ahead. And with labour-market softness continuing, the macro backdrop itself may prompt further monetary easing, regardless of who takes the position. We believe, the rate cut could be potentially more than 25 bps in 2026, which should support US markets as it did this year, even when AI bubble fear periodically spooked the markets. A continued rate cut cycle may mean equity markets can have more legs in the near term. Also, Fed easing could likely benefit EMs as well.

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