The U.S. Federal Reserve’s decision to implement a 25 basis points rate cut and lower the federal funds rate to 3.50%–3.75% marks a continued pivot toward accommodative policy in 2025, according to Naval Kagalwala, COO & Head of Products at Shriram Wealth Ltd. With this move, the third Fed rate cut in 2025, the central bank has reduced rates by a total of 75 basis points, responding to persistent inflation, cooling employment data, and shifting economic conditions.

Kagalwala noted that the monetary policy tone was distinctly dovish, emphasising the Fed’s focus on rising downside risks to employment. “The dot plot remains unchanged from the September 2025 FOMC meeting, inflation is revised lower, and real GDP projections are stronger,” he said. “Members highlighted employment risks, contributing to a steepening of the rate curve.”

Key Highlights

• Fed cuts rates again as dovish policy tone grows ahead of 2026 outlook
• Powell signals data-driven stance as markets react to Fed rate decision

He added that the Fed’s positive outlook—supported by strong consumer spending and business investments in AI, reinforced confidence in U.S. growth. For India, lower U.S. interest rates could support FII inflows, aided by improving corporate profitability and valuations.

Kagalwala emphasised Jerome Powell’s reiteration of a data-dependent approach, with policy rates now within the estimated neutral range. Markets will closely watch upcoming U.S. inflation, jobs data, GDP growth, and the Fed’s forward guidance, especially amid a divergence in voting.

The Fed also highlighted a decline in banking system reserves and confirmed plans to purchase short-term Treasury securities to maintain liquidity. Updated projections showed an upward revision in expected U.S. GDP growth for 2026.

Market reaction was mixed: U.S. stock futures edged lower, while Sensex and Nifty 50 gained. Oil prices held steady, and cryptocurrencies such as Bitcoin and Ethereum slipped modestly.

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With Jerome Powell’s term ending in May 2026, discussion on potential Federal Reserve leadership changes intensified. The next FOMC meeting on 27–28 January 2026 will be watched closely for cues on U.S. monetary policy.