FOMC Meeting Kicks Off: US Fed Expected to Cut Policy Rates by 25-50 Basis Points

For months, businesses and investors worldwide have been closely monitoring the two-day Federal Open Market Committee (FOMC) meeting set to begin on September 17, with hopes that the US Federal Reserve will start lowering policy rates. As global markets head into a new trading week, anticipation builds as investors eagerly await the Fed’s decision on interest rates.

The FOMC is widely expected to reduce policy rates by either 25 or 50 basis points (bps). In addition to the rate cut, investors will carefully assess the Fed's commentary to gain insight into the potential timing and scale of future rate reductions.

US Federal Reserve Chairman Jerome Powell will preside over the two-day FOMC meeting, with the outcome scheduled for announcement on September 18 at approximately 11:30 PM Indian Standard Time, followed by a press conference.

Experts suggest this could mark the beginning of a series of rate cuts. In a speech last month at Jackson Hole, Wyoming, Powell emphasized the Fed’s willingness to cut rates to support the labor market and to aim for a “soft landing” in the US economy—a term describing the Fed's attempt to lower inflation without triggering a severe recession or significant unemployment rise.

At its previous meeting, the Fed, under Powell’s leadership, opted to keep interest rates steady in the range of 5.25 to 5.50%. If the Fed announces a rate cut this week, it would be the first since March 2020, when rates were slashed to near zero to help the economy cope with the impact of the COVID-19 pandemic.

The Fed began raising rates in 2022 in response to surging inflation driven by post-pandemic supply chain disruptions and the ongoing conflict in Ukraine. For the past 14 months, the key lending rate has remained at a two-decade high of 5.25 to 5.50%.

“The Fed’s first rate cut in four years is almost a certainty. The only question is whether it will be a 25 or 50 basis point cut,” noted Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

A Reuters report on Friday, September 13, tracking rate-futures contracts, indicated that the Fed is nearly as likely to make a larger-than-expected rate cut next week as it is to opt for a more typical reduction. According to the report, there is a 47% chance of a 50-basis point cut, although a 25-basis point reduction remains slightly more likely.

Regardless of the Fed’s decision, experts predict volatile market reactions. “If the Fed cuts rates by 50 bps, markets are expected to rally, but I believe they will correct just as quickly, as such a drastic cut could signal desperation,” said independent market analyst Ambareesh Baliga.

Baliga anticipates a more gradual approach to rate cuts, given how long the Fed has delayed this move. He expects the US central bank to begin with a 25-bps cut to start the cycle.

"Many traders have already priced in a 25-bps rate cut by September due to the negative market sentiment and a series of sharp declines in stock prices," explained Palka Arora Chopra, Director of Master Capital Services. She also pointed out that expectations for a 25-bps cut were reinforced by the US consumer price index (CPI) report released on September 11, which showed inflation falling to 2.5% year-on-year from 2.9%, while core inflation held steady at 3.2%.

Analysts agree that the Fed’s communication will be key in determining the pace and magnitude of future rate cuts and in shaping market sentiment globally. They further suggest that a 50-bps rate cut could signal ongoing challenges in the US labor market, whereas a more modest 25-bps cut would reflect a more cautious approach by the central bank.

Swapnil Aggarwal, Director at VSRK Capital, remarked, "The market’s reaction will largely depend on the rationale behind the Fed’s decision. If the cut is driven by concerns over economic slowdown or rising unemployment, the market response could be muted."

However, Aggarwal added, if the Fed is reducing rates due to stable growth and low inflation, markets might respond positively to the improved borrowing environment.