The US Federal Reserve has reduced its benchmark interest rate by 25 basis points, setting it within a range of 3.75% to 4.00%, as it seeks to cushion the economy amid signs of a cooling job market and slowing inflation. This marks the Fed’s first rate cut in over a year, reflecting growing caution about the pace of economic growth in the United States.

Vishal Goenka, Co-Founder of IndiaBonds.com, on the implications of this decision commented, “The US Fed cut benchmark overnight rates by 25bps as expected. However, Governor Powell very distinctively highlighted that any further cuts in next December meeting is not a done deal. Their decision-making is further complicated by lack of published economic data due to US government shutdown."

He added, "This is a clear green lighting for RBI to cut repo rate in its next meeting in early December. Its last policy was defined as a dovish pause and that’s exactly what it did to markets by reigning in further widening of long end government yields. However, for proper transmission of earlier rate cuts to come through the banking sector, a flatter and lower long end yield curve is required. With US cutting rates, would expect RBI to also move in same direction and long end government bonds look attractive.”

Key Highlights

• Federal Reserve cuts its benchmark rate by 25 bps to 3.75 %-4.00 % amid labor-market softening.
• Chair Jerome Powell cautions that a December rate cut “is not a foregone conclusion” and future action remains data-dependent. 

Fed Chair Jerome Powell, following the two-day Federal Open Market Committee (FOMC) meeting, stated that the decision was driven by the need to maintain stability while ensuring inflation continues to trend toward the 2% target. He acknowledged that while inflation has moderated compared to 2022 levels, it remains somewhat above desired levels. Powell added that recent economic indicators show slower job creation, moderated wage growth, and easing demand, but that the overall labor market remains resilient.

In a significant move, the central bank announced it will end its balance sheet runoff starting December 1, halting the reduction of Treasury and mortgage-backed securities to improve market liquidity and maintain smoother financial conditions.

Powell emphasized that the Fed’s future policy direction will remain data-dependent, with no assurance of additional cuts this year. He also pointed out that the ongoing US government shutdown has delayed the release of critical economic data such as payroll reports, making it more challenging to assess the near-term economic outlook.

Also Read: US Fed Cuts Rates by 25bps; Powell, FOMC Face Dissent on 50bps

Financial markets reacted cautiously to the announcement. US Treasury yields rose slightly, while equities traded mixed, reflecting investor uncertainty over how far the Fed might go in easing monetary policy. The rate cut signals a shift from the Fed’s previously aggressive tightening stance to a more balanced, wait-and-watch approach aimed at supporting growth without reigniting inflationary pressures.

Naval Kagalwala, COO & Head of Products, Shriram Wealth Ltd Policy announced last night, “The FOMC cut its benchmark rate by 25 bps (bringing the benchmark rate to a targeted range between 3.75% to 4.00%), while also pulling back from its quantitative tightening programme following concerns around short term funding for select banks."

"The decision on rate easing was not unanimous, with one member voting for 50 bps easing, while another voted in favour of no change in rates. Policy easing was largely along expected lines. However, treasury yields edged higher after Fed chair Powell noted that a further reduction in interest rate in the upcoming meeting in December was not a “foregone conclusion”, he added.

"This cautious approach was adopted given a clouded economic outlook given the ongoing government shutdown, and a limited set of economic indicators available. The yields moved higher, and these were more pronounced in the near end of the curve (rate sensitive segment). From Indian bond markets perspective, focus now shifts to trade negotiations between India and the US, extent of INR depreciation, and RBI’s liquidity management approach (given an increased talk around a possibility of the central bank doing OMO purchases to allow the yield curve lower and support bank deposits growth)", Naval Kagalwala stated.