Mumbai: Yet another much anticipated 25 basis point interest rate cut by the US Federal Reserve a day before failed to cheer global markets on Thursday. The Fed reduced its benchmark overnight rate to the 1.75% to 2% range on Wednesday. One basis point is one hundredth of a percentage point.
Global equity markets weren’t too euphoric in spite of the US Federal Reserve cutting interest rates for the second time this year. US equities ended Wednesday’s session with marginal gains. Asian equities started Thursday’s session in the black, but failed to hold onto the gains and are currently trading mixed. Indian key benchmark indices, the Nifty and the Sensex, opened in the red on Thursday and traded on a weak note.
What explains this muted reaction? According to analysts, an interest rate cut with little concern about the outlook has left the market dissatisfied. In the current backdrop of global slowdown, there are heightened expectations of further easing.
According to analysts at the research arm of ICICI Bank, from a market’s perspective, the recent action could be described as a ‘hawkish cut’, given that there were references that the recent easing remained more of an ‘insurance’ than a full-fledged easing cycle.
"We are maintaining our call of another 25 bps 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 previously anticipated," it said in a report on 19 September.
The CME Group's FedWatch tool also showed that after the Fed's latest policy action, expectations of another 25 bps interest rate cut rose from 21% to 45%.
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 investments due to the ongoing trade war. So further policy action will depend on how well or badly the October meeting between the US-China pans out.