U.S. Federal Reserve Chair Jerome Powell’s latest policy move—a 25 basis point rate cut coupled with hawkish guidance—has dimmed prospects for a year-end "Santa rally" in global equity markets. The Dow Jones Industrial Average saw its worst day in over four months, while India’s Sensex dropped over 1,100 points, inching closer to the 79,000 mark.
Although markets had anticipated the rate cut, Powell’s cautious tone and a significantly revised dot plot have raised concerns. The Fed now projects only two rate cuts in 2025, down from four previously forecasted in September. Similarly, the outlook for 2026 has been trimmed to just two cuts. Powell emphasized that the timing and extent of future rate reductions would be data-dependent, signaling that the Fed could "be more cautious" after already lowering rates by 100 basis points this year.
Adding to market jitters, the Fed raised its inflation forecast. Personal Consumption Expenditure (PCE) inflation is now expected to hit 2.5% by the end of 2025, up from 2.1%, and core inflation is projected at 2.8%. Even by 2026, inflation is forecast to be slightly above the Fed’s 2% target, signaling persistent price pressures. This acknowledgment of inflation challenges has led to a surge in U.S. 10-year bond yields, which crossed 4.5% for the first time in six months.
Impact on Global and Indian Markets
Higher bond yields are weighing on U.S. equity markets, particularly interest-rate-sensitive sectors like real estate, utilities, and tech, which rely on lower rates to boost the present value of future earnings. Analysts warn of further declines if bond yields continue to rise, with ripple effects expected in emerging markets, including India.
India’s benchmark indices, the Sensex and Nifty, mirrored global sell-offs. The Nifty breached the critical 23,900 level, raising concerns of further declines to around 23,500. Options data indicates a bearish outlook as call sellers shift their positions closer to current prices, reflecting heightened selling pressure.
Sectoral Impact
The Fed’s hawkish stance and a stronger dollar have uneven implications for Indian sectors. Interest-rate-sensitive industries like real estate, automobiles, and capital goods may face challenges. However, export-driven sectors, particularly IT, could benefit from a stronger dollar.
Broader Economic Implications
The Fed’s hawkish pivot underscores its commitment to tackling inflation, even at the cost of slower monetary easing. The U.S. central bank revised GDP growth projections for 2024 upward to 2.5% from 2%, reflecting resilience in economic activity despite higher interest rates. This “higher-for-longer” rate strategy is expected to influence other central banks globally, including the Reserve Bank of India (RBI).
In summary, the Fed’s hawkish rate cut and cautious tone have roiled global markets, with ripple effects spreading to Indian equities. While short-term volatility looms, investors are advised to focus on fundamentally strong stocks and avoid overreacting to global market gyrations.
