It was a given – a rate cut was certain, the US markets had already discounted for it. But whether it would be 25 bps or 50bps – that was the only unknown.
Allowing politics to enter the central bank, the FOMC, cut rates by 25 bps. The Fed also announced that it would end the runoff of the $3.8 trillion asset portfolio on Thursday, two months earlier than previously planned. This is a good move or else the balance sheet policy would have worked at cross purposes with the interest rate policy. This will have no impact on the economy as it was as such to be wound down by end of Sept.
Overall, the Fed said that the US economy was solid but there is worry about a slowdown in business investment tied to ongoing U.S. trade disputes that appear to have contributed to a weakening in the world economy.
The way Trump has been putting pressure on the Federal Reserve to cut rates, Jerome Powell was expected to do exactly that tonight. You look at the economy of the US – growth is strong, unemployment is at a 50-year low, consumer confidence is high and inflation remains low. So why exactly did Powell cut rates tonight if not politics?
One argument – a rate cut will boost the already growing economy as it will increase the supply of money and that, more than anything else, will drive changes in the nominal GDP. Maybe it is also a way to prepare the US economy with some wiggle room if the trade war with China gets more intense and not to mention the fear of a no-Brexit deal. Thus a rate cut could have been more to protect the economy from international storms. Not to mention that a rate cut would weaken the dollar, which in turn, will make US exports more attractive to foreign buyers. And maybe it is this reason alone – exports, which made Trump meddle with the business of the Fed in the first place.
Thus this rate cut is more like an immunization shot in the arm of the US, preventing it from catching the bug of cold which has ravaged the health of China, Europe and UK. The US markets shrugged this rate cut as a non-event which was already discounted for. While the market was hoping to see some hints about more easing in the future, “will assess realized and expected economic conditions” to determine what’s next. Maybe that “next” would be another rate if clouds gather over the horizon though the economy continued to do well. Or maybe if Trump continues with his vitriolic rhetoric.
How does this affect the Indian markets? It could continue to focus on domestic news. Macro economic news from the CAG was not good – India’s fiscal deficit has already crossed 60% percent of the full-year target in June.
Auto sales number will come in and it is not expected to be any different from what we have been seeing for the past few months. In this atmosphere of slowdown, SBI proposing higher collateral from auto dealers of 25% and this could break down the morale of the already depressed sector.
In stock specific, Zee Entertainment could be buzzing and so will Eicher Motors, IOC, Ashok Leyland. For us, 7th August will be the most awaited date – let’s see if RBI follows the Fed’s move. Of course, a roll back on the surcharge by excluding the FPIs/FIIs from it would see the market bounce back with all vigor. Lets see when that happens….