- 19 Dec 2024
- ICICI Securities
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US FED CUT INTEREST RATE BY 25BPS BUT LOWER CUTS NEST YEAR SPOOK MARKETS
News: US Federal Reserve cut interest rate again but with lower magnitude of 0.25%, making its third reduction since 2020. 11 of 12 Fed voters back the cut bringing Federal Reserve fund rate to a range between 4.25%-4.50%. Federal Reserve Chair Jerome Powell said further cut in borrowing costs depends on further progress in lowering stubbornly high inflation. FOMC Economic projections signaled that the pace of easing in monetary policy will likely slow in 2025. On the data front Fed revised up its projections for inflation. It expects core inflation to rise to 2.5% next year compared to September projections of 2.2% while unemployment rate is seen declining modestly for both 2024 and 2025. GDP growth rate is projected higher at 2.1% in 2025 compared to September Projection of 2.0%. Dollar and Yields rallied after FOMC meeting. Dollar rose to 108.20, 10-year treasury note rallied to 4.52% and 2-year treasury yield, which typically moves in step with interest rate expectations move north to 4.359%. The change in commentary from FED regarding future cuts has spook the markets and sharp reversal was seen in Dollar and Yeilds.
Views: We expect dollar index to rally further towards 110 level in coming months as US Federal Reserve signaled a slower pace of rate cuts in 2025. Further, improved economic data from US signal resilience in the economy compared to its peers, supportive for dollar.
Impact: Negative