Fed cuts rates by 50bps! What Now? Melt-Up or NIFTY-50 Crash?
The Federal Reserve kicked off what is arguably the most pivotal event to impact financial markets globally this year. On 18-Sep-24, the Fed kicked off what is only the fourth rate cut cycle of this century with a big bang 50 basis points cut this year. The start of rate cuts came on the back of an unmistakable slowdown that has been taking hold in the US economy and the US jobs market over the last few quarters, and this in turn finally forced the Fed to start the rate cut cycle with a larger than usual 50 bps cut.
But what are the implications of the start of fed rate cuts for equity markets?
History shows that rate cuts, as and when they start, are at least initially, cheered by equity markets as a bullish signal and are marked by strong rallies in equity markets. However that’s usually a completely wrong interpretation, because the real reason the Fed has to start cutting rates towards the end of every business cycle is NOT because it really intends to pander to equity markets, but because the economy is in such a bad state by then that the Fed simply has no option left but to cut rates, in the hope that rate cuts would be able to salvage the economy and prevent it from slipping into a recession. And yet history shows that Fed has hardly ever been successful in this, and that the US economy has invariably slipped into the next recession anyways, despite the Fed starting to cut rates! Furthermore, recessions in the US have invariably been marked by steep stock market corrections, NOT just in the US, but pretty much around the world including here in India.There have been few exceptions to this pre-dominant pattern though, most notable of which is the instance of 1995, when the Fed was able to in fact engineer what is called a “soft landing”. This is arguably the only instance of the Fed being able to carefully time and calibrate the rate cuts so as to prevent the US economy from slipping into a recession outright!
So what is in store this time round? I discuss exactly that in this below video. So do watch this video till the end.
