While S&P 500 surrendered earlier gains following Powell’s stark warning that inflation in goods prices is expected to surge over the summer as Trump’s tariffs hit consumers, Sensex and Nifty were also trading near the flatline on Thursday morning.
While the median dot plot still shows two cuts in 2025, a sharp divide has emerged within the Fed ranks – seven of the 19 members now see no rate cuts this year, up from just four in March.
The numbers are such that it would take just one member changing their forecast to move the median to one cut in 2025. The FOMC also removed one cut from 2026, signaling expectations of just a single reduction next year.
What This Means for Indian Markets
Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited, offered a measured assessment: “The Fed decision and commentary have come on expected lines. Jerome Powell’s comment that ‘despite heightened uncertainty, the economy is in a solid position’ is important.”
However, Vijayakumar struck a cautionary note about immediate expectations: “It would be realistic not to expect rate cuts from the Fed immediately. With only 1.4% GDP growth expected this year, the US is unlikely to attract a lot of capital flows. This is favourable for India. But since Indian market valuations remain a concern, a sustained rally will happen only when we get indications of sustained earnings growth, which is some time away.”
Anitha Rangan, Economist, Equirus Securities, warned of a more hawkish Fed trajectory: “The Fed policy has become more hawkish than expected not just for this year but prospectively as well. With the ongoing tensions around the geo-politics with still uncertainty around tariffs, the Fed could turn more hawkish down the road.”
This shift could have profound implications for India’s monetary policy. “RBI may also well want to hold on to its neutral stance for a longer period of time. The pause may well be the narrative until there is clarity on the external front,” Rangan noted, adding that “the new norm could well be higher inflation, moderate growth and higher rates as a result.”
Interest rate futures markets are now pointing to September as the most likely timing for the next rate cut, with Madhavi Arora, Lead Economist at Emkay Global Financial Services, noting that “Market pricing reflects this, with pricing for a cut at ~63%, while July is at only ~10%.”
JM Financial highlighted the central uncertainty plaguing markets: “The main focus of Powell was on the uncertainty around the impact of the tariffs on growth and inflation, however, his commentary lacked clarity. This indicates the extent of uncertainty that even the US central bank is facing on the tariff policy.”
The firm expects robust growth combined with elevated inflation to “push the rate cut expectation closer towards the year-end,” with a key focus on whether the tariff deadline of July 9th is met or postponed further.
As global investors navigate this “very foggy time,” the message from the Fed is clear: patience will be required, and the path ahead remains fraught with uncertainty. For Indian markets, this translates to a period where domestic fundamentals and earnings growth will need to drive any sustained rally, rather than relying on global liquidity tailwinds.
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