US Fed likely to cut key rates this week. Why is it a big deal?

The upcoming Federal Reserve meeting on September 17-18, 2024, has investors on edge.
The US central bank is likely to cut interest rates for the first time in more than four years, with experts predicting a 0.25 percentage point reduction.
A rate cut could provide a significant boost to global stock markets and potentially reduce current market volatility.
More importantly, it might enhance the prospect of a ‘soft landing’ for the world’s largest economy, helping to navigate economic uncertainties more smoothly.
A potential cut in rates could mean cheaper borrowing costs for everyone, from businesses to homeowners.
For consumers, this could translate into lower mortgage rates and more opportunities to refinance existing loans. For the stock market, historically, rate cuts have often led to higher stock prices as lower borrowing costs boost company profits and consumer spending. This cut could also help the global economy avoid a rough patch and potentially ease market volatility.
Swapnil Aggarwal, Director at VSRK Capital, explained that the Fed’s decision could be a cautious step to support a slowing economy or a strategic move to encourage growth amid low inflation.
“If the rate cut is in response to concerns about a slowing economy or rising unemployment, the positive market effect could be muted,” Aggarwal noted.
“Conversely, if the Fed is cutting rates due to low inflation and a stable growth outlook, markets may rally in response to the more favorable borrowing environment. All eyes are on the Fed as it navigates this complex economic landscape,” he added.
Palka Arora Chopra from Master Capital Services pointed out that market sentiment has shifted from expecting no change to pricing in a 25 basis point cut. Recent stock market declines and economic indicators influenced this expectation.
Chopra explained, “If inflation is below the Fed’s target (usually around 2%), a rate cut can help to stimulate the slowing economy, boost demand, and push for higher growth. Persistent low inflation can lead to economic stagnation.”
“Generally, the Fed lowers interest rates in reaction to deteriorating or weakening economic conditions. A significant cut of 50 bps (0.50%) is larger than the more typical 25 bps cut, signaling a more aggressive or urgent need to stimulate the economy,” she added.
Market analyst Alex Volkov from VT Markets highlighted recent US inflation data, which shows a slight decline. He suggested that this data supports the expectation of a 25 basis point cut but noted concerns about whether a larger cut might be necessary. “Given the higher probability, if November sees only a 25 basis point cut, it is likely that a 50 basis point cut will follow in December,” Volkov added.
Raj Patel, CMO at MintCFD, anticipates a conservative 25 basis point cut rather than a larger reduction. “A 25 bps cut could show muted results from the market; however, a major rate cut in the magnitude of 50 bps could generate negative reactions, as it might indicate that the Fed is signalling major concerns about the economic outbreak,” Patel said.
Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, agreed that while rate cuts are generally beneficial for markets, a larger cut might be interpreted as a sign of economic trouble, which could dampen investor sentiment. The performance of banking stocks and other financial sectors, alongside the Fed’s comments, will be crucial in determining the market’s reaction.
As the Fed prepares to announce its decision, investors will be closely watching for its potential impact on both global and local markets, including Dalal Street.