On July 30, the US Federal Reserve avoided surprising the markets by keeping the federal funds rate unchanged for the fifth consecutive time, in the range of 4.25 per cent to 4.50 per cent.
The US Fed has kept lending rates steady since January 2025 despite the increased risk of inflation due to President Donald Trump's tariff policies. Meanwhile, job market conditions remain healthy.
The Federal Open Market Committee (FOMC) voted 9-2 to keep rates unchanged and stated that it will assess incoming data, evolving outlook, and the balance of risks carefully before taking a decision on rate cuts.
Check our extensive coverage of the US Fed's July meeting here
“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” said the FOMC.
The US Fed's July policy decision was along expected lines and had already been fully priced in by the markets.
However, expectations of clear rate-cut signals were not met. Fed Chair Jerome Powell did not offer any definitive hint about a potential rate cut in September. The market will now have to rely on incoming data to anticipate the future trajectory of interest rates in the US.
Powell reiterated the Fed's focus on controlling inflation and highlighted that while inflation is easing, the tariff policy has raised the risk of price pressures rising significantly.
“Near-term measures of inflation expectations have moved up, on balance, over the course of this year, on news about tariffs as reflected in both market-based and survey-based measures beyond the next year or so. However, most measures of longer-term expectations remain consistent with our 2 per cent inflation,” said Powell.
Powell believes it is still early to assess the real impact of Trump's tariffs on inflation and growth.
“The Fed’s cautious, data-dependent stance comes amid growing concern that the ongoing trade war may hinder progress toward the 2 per cent inflation target. This posture remains firm despite mounting political pressure, including President Trump’s recent calls for aggressive rate cuts to as low as 1 per cent,” Jigar Trivedi, Senior Research Analyst at Reliance Securities, observed.
In a post-policy news conference, Powell hinted that the agenda for the Fed's September meeting was not set yet and the FOMC has not decided whether a rate cut will happen.
The US Fed's next policy meeting is scheduled for September 16-17.
"The message from the Fed chief is that the 'modestly restrictive policy' will continue since 'the base case scenario is a short-lived increase in inflation' caused by higher tariffs. This means that a rate cut may not happen in September," said Vijayakumar.
"It is important to understand that the US economy is in a solid position with low unemployment and reasonable growth of 1.2 per cent in H1 2025. In brief, the US economy is not screaming for a monetary stimulus through rate cuts immediately. Therefore, going forward, the Fed is likely to respond to incoming data and evolving outlook, as it always does," Vijayakumar said.
Even if the Fed decides to keep rates unchanged beyond September, the Indian stock market may not experience a significant negative impact.
"I don’t believe the Indian stock market will experience a significant negative impact from a delayed rate cut by the US Fed. Indian equities, as an asset class, are different from debt instruments for US investors. Elevated US interest rates may affect debt inflows, but not equity inflows. For equities, the impact is likely to be small and manageable, said G Chokkalingam, the founder and head of research at Equinomics Research Private Limited.
Chokkalingam highlighted Powell's comments on persisting uncertainties, which suggest that rate cuts are unlikely in the short term.
"It may take more than one or two quarters—possibly even longer—before the Fed begins easing. Over the past two months, tariffs have been on the rise, and their impact is expected to come with a lag. The September–October period will be crucial to observe how these tariffs affect US inflation," said Chokkalingam.
At the current juncture, Trump's tariffs, not the Fed's restrictive policy, are the major risks for the Indian stock market.
Trump, on July 30, announced a 25 per cent tariff on India, to be effective from August 1, and a penalty due to India's energy and defence ties with Russia.
"The 25 per cent tariff on India, plus an unspecified penalty for energy and defence-related purchases from Russia, is very bad news for Indian exports and thereby affects the growth prospects of the Indian economy in the short run. Since trade negotiations with India are continuing, perhaps the 25 per cent tariff may come down eventually. This short-term hit will reflect in the stock market, too, in the short term," said Vijayakumar.
However, Chokkalingam believes the market will stabilise after a1-2 per cent fall and there will be more sector and stock-specific reactions.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
