Global equity markets weren’t too euphoric in spite of the Fed cutting interest rates for the second time this year. US equities ended Wednesday’s session with marginal gains. In Asia, equity markets, including India, didn’t show much enthusiasm on Thursday.
What explains this muted reaction? According to analysts, an interest rate cut with little concern about the outlook has left the markets dissatisfied. They feel, in the current backdrop of global slowdown, there are heightened expectations of further easing.
Analysts at the research arm of ICICI Bank Ltd said that from a market’s perspective, the recent action can be described as a “hawkish cut" given that there were references that the recent easing remains more of an “insurance" than a full-fledged easing cycle.
“We are maintaining our call of another 25bps cut in 2019 and possibly more accommodation over 2020 if external headwinds remain in place, but acknowledge that the bar for easing is a lot higher than we previously anticipated," it said in a report on 19 September.
The CME FedWatch Tool also shows that after the Fed’s latest policy action, expectations of another 25bps interest rate cut have risen from 28.2% to 42.8%.
In short, the Fed is largely optimistic about the US’ growth outlook and its decision to trim rates was based on external factors—weakness in exports and investment due to the trade war. Therefore, further policy action will depend on how well or how bad the October meeting between the US and China turns out.
Analysts at Nomura Holdings Inc. are of the view that the slowdown will be sufficient to move some of the more hawkish participants into the dovish camp. They believe that another 25bps rate cut at the October meeting remains the most likely outcome for this year, before the Fed holds rates steady through 2021.