Fed Readies to Deliver its First Rate Cut of 2025 but Investor Focus Remains on Dot-Plot, Powell's Comments

As the US Federal Reserve stands on the cusp of delivering its policy outcome around midnight on September 17, market participants are vouching for a nearly fixed 25 basis point reduction in interest rates. While hopes of a bigger 50 basis point cut are slim, what investors do anticipate is for the Fed to slash rates three more times, by a cumulative 70-75 bps before the year end.

 “The Fed is expected to cut rates by 25 bps tonight. More than the rate action the Fed commentary on the evolving economic outlook and the trajectory of future rate action will be closely watched by the market," VK Vijayakumar, Chief Investment Strategist, Geojit Investments.

“For investors, it means the conversation is shifting. Policy that was restrictive for the past two years may now start to turn supportive. Lower rates could help stocks, particularly in areas like technology and housing. Whether the Fed cuts by 25 or 50 bps, the bigger message is that it is moving to keep the economy steady and that shift matters for investors everywhere,” said Viram Shah, Founder & CEO, Vested Finance.

Expectations of the Fed delivering its first rate cut since December 2024 have gathered momentum after back-to-back data from the US labour market suggested cracks opening up. On that account, Asutosh Mishra, Head of Research, Ashika Institutional Equities, believes attention will quickly turn to the dot plot for clues, on whether the Fed signal back-to-back cuts in October and November, or does it stay guarded amid lingering inflation concerns.

“Inflation remains the key swing factor, with tariffs posing the risk of a near-term flare-up. The labor market looks steady but is showing early cracks, low unemployment paired with fewer job openings points to rising recession risks. With the neutral rate estimated near 3% versus the current near 4.4%, the Fed has meaningful room to ease if conditions deteriorate,” Mishra added.

That said, a large pool of market participants are pinning hopes on seeing two more rate cuts till the year end. Riya Singh, Commodities and Currency Analyst, Emkay Global Financial Services pegged a base case scenario of a 25 bps cut tonight, followed by 25 bps moves in October and December, with the committee entering 2026 with a cumulative easing of roughly 125 bps from today’s level. “This aligns with a scenario where 2025 ends around 3.75–4.00% and 2026 moves toward 3.25–3.50%,” Singh added.

Dot Plot and Commentary in Focus

More than the actual rate outcome, investors will be on the lookout for Fed Chair Jerome Powell’s outlook for the labour market and upside risks to inflation, more so, in the midst of Trump’s tariff wars. The Fed’s dot-plot will also be on the radar for investors to gauge the potential policy trajectory for the upcoming months.

“The policy statement, the updated dot-plot and the post-meeting press briefing are the three pillars that will determine whether markets view tonight’s move as the first step in a measured glide path or the opening salvo of a more aggressive easing sequence,” Singh said.

The current dot-plot median for 2025–27 consensus leans to two cuts in 2025, implying that the policy ends 2025 at 3.75–4.00%, as compared to today’s 4.25–4.50%. On the other hand, 2026 median expectations anticipate a shift towards 3.25–3.50% and further lower in 2027 to 3.00–3.25%.

A clear, dovish signal through either Powell’s commentary or the updated dot-plot, may trigger a positive knee-jerk reaction across global markets, however, the sustenance of that optimism will still remain under question.

What it Means for Indian Markets?

Historically, Fed rate cuts weaken the dollar and improve the relative returns of emerging market assets, often spurring global investors to reallocate capital. While a rate cut may still trigger a positive knee-jerk reaction for Indian equities this time around as well, it is unlikely to spur a change in FII sentiment.

The persisting uncertainty over the trade relationship between India and the US still remains fragile, especially given that a trade deal is yet to be signed. Meanwhile, India’s faltering earnings-per-stock growth and muted returns this year have already weighed on FII sentiment. Those concerns are unlikely to get dialed back so soon, however, some positivity still remains on the table.