US Fed cuts key interest rates by 0.25%: 3 key takeaways for stock markets

Stock markets are expected to open lower on Thursday, following a global market slump after the US Federal Reserve cut interest rates by 25 basis points.

The Fed’s decision, along with its forecast of fewer rate cuts in 2025, rattled investors across the globe, leading to widespread sell-offs in equities. The US Federal Reserve reduced its benchmark interest rate by 0.25%, bringing it to a range of 4.25% to 4.50%. The move was widely anticipated; however, the Fed surprised markets by signalling a slower pace of rate cuts in the coming year.

In its latest projections, the Fed halved the number of quarter-point cuts it expects in 2025, reducing them from four to just two. This unexpected shift has raised concerns that higher interest rates may persist longer than previously thought.

Fed Chair Jerome Powell said inflation has “eased significantly” but remains “somewhat elevated” compared to the central bank’s target of 2%. Powell expressed optimism about the US economy, adding that the Fed is “significantly closer” to ending its current rate-cutting cycle.

GLOBAL MARKET REACTIONS
Wall Street reacted negatively to the Fed’s announcement, with all three major US indices—Dow Jones, S&P 500, and Nasdaq—posting their biggest single-day losses in months. Yields on US Treasurys surged as investors adjusted to the prospect of prolonged higher interest rates.

Asian markets followed suit, with major indices in the region also trading lower. Gift Nifty, an indicator for the Indian markets, was trading around 23,935—about 320 points below Nifty futures’ previous close—suggesting a gap-down opening for Indian equities.

IMPACT ON SENSEX AND NIFTY

The domestic benchmark indices, Sensex and Nifty 50, are expected to mirror global trends and open in the red. Market participants remain cautious about the broader implications of the Fed’s slower pace of easing, especially as inflation and global economic uncertainties persist.

“Bullish sentiments took a hit after the Fed reduced its projections for rate cuts in 2025. While the 25 basis point rate cut was expected, the trimmed outlook for future cuts has upset market sentiment. Nifty’s 200-day moving average at 23,816 may come under pressure as the indices look poised for a negative opening,” said Mehta Equities in its theme of the day for the markets.

WHAT TO EXPECT
Santosh Meena, Head of Research at Swastika Investmart Ltd said that a sharp sell-off has been witnessed in global markets following a hawkish rate cut by the US Federal Reserve.

“Gift Nifty indicates a gap-down opening, continuing the three-day losing streak. The first major support to watch is the low of the December series at 23,923, with the 200-DMA around 23,800 serving as a critical support level. The Put-Call Ratio (PCR) at 0.55 reflects an extremely oversold market, suggesting a possibility that Nifty could find support in the 23,923–23,800 zone and trade sideways. Overall, the market remains largely range-bound, with a focus on sector-specific and stock-specific movements,” he added.

Investors in the Indian markets will be closely monitoring global cues, including the performance of US stock futures and Asian indices. The impact of the Fed’s decisions on foreign institutional investments (FIIs) in Indian equities will also be a key factor.

While the Fed’s move is seen as a step closer to ending its current rate-cutting cycle, its cautious approach has cast uncertainty over the pace of global economic recovery. Indian markets, like their global counterparts, will remain on edge as they navigate this evolving economic landscape.

Dalal Street has faced a rough patch over the past few trading sessions. The benchmark indices, the S&P BSE Sensex and the NSE Nifty50, extended their losses on Wednesday, leaving investors worried about their year-end performance.

The Sensex dropped by 502.25 points to close at 80,182.20, while the Nifty50 declined by 137.15 points to settle at 24,198.85. Financial and banking heavyweights were among the major losers, dragging the indices down further.

“The Indian market is experiencing a breakdown in the early Santa Claus rally, with the impact being more pronounced in India compared to developed markets due to the rapid appreciation of the dollar. Market sentiment remains cautious ahead of the FOMC meeting and potential policy and tariff shifts from the incoming US administration,” said Vinod Nair, Head of Research, Geojit Financial Services.