US Fed rate cut: How it will impact domestic stock market, rupee & gold

The US Federal Reserve's  third consecutive rate cut was welcome, but the US Fed Chair Jerome Powell raised a few eyebrows in noting that job growth continues to be overstated by around 60,000 a month, implying that the actual job growth has perhaps been negative, which merits a more neutral policy rate.

"But the message from this meeting was that the time for insurance cuts is over, and that further cuts will only come with a material labor market deterioration. Interestingly, with Powell stating that true payroll growth has likely been closer to -20k per month since April, there may be downward benchmark revisions ahead, suggesting job losses are already underway," said Madhavi Arora of Emkay Global.

Although Powell sounded relaxed on inflation, the tension in the Fed's dual mandate manifested in the three dissents in the vote split around the cut: two hawkish (Goolsbee and Schmid) and one dovish (Miran).

"While risks are two-sided, the Summary of Economic Projections (SEP) showed Goldilocks-esque revisions to the 2026 outlook of upward revision in growth and downward revision in inflation ahead-potentially reflecting the higher expected productivity growth," Emkay's economist said. 

The 2026 growth was revised up by 0.5 per cent to 2.3 per centwhile core inflation was revised down a tick, to 2.5 per cent, and the unemployment rate is expected to dip to 4.4 per cent from 4.5 per cent this year.

The Fed’s projection seems optimistic, considering the stable unemployment rate, while Powell hinted at data distortions due to the recent government shutdown, JM Financial said.

"We believe further deterioration in the labour market will open policy space for easing; moreover, the change of guard at the helm of the Fed will sentimentally revive expectations of policy easing in 2026. Markets reacted positively to today’s policy action and are factoring in a status quo in January. We believe that a clear picture will emerge only when macro economic data both on the labour market and inflation becomes available in the upcoming months," JM Financial said.

Impact on stock market, gold, rupee
US stock indices Dow Jones and S&P500 settled up to 1 per cent higher. US bond yields fell by 2-5 basis points and the broad curve bull steepened, with the move largely  coming during Powell's presser, which US markets read as less hawkish guidance than expected. 

The 10-year UST yield eased by 4 basis points to 4.15 per cent. Dollar index was mildly weaker than peers.

"All this policy uncertainty is negative for emerging markets. Regarding India, the impact is a bit worse as the India–US. trade deal has also not been finalised. These developments are putting additional downward pressure on the rupee–dollar exchange rate. As a result, we expect FII inflows into India to remain under pressure, which could further weigh on equity valuations and influence debt markets," said Nachiketa Sawrikar, Fund Manager, Artha Bharat Global Multiplier Fund.

In contrast, Sawrikar said gold prices in India are likely to remain supported in this environment. While India’s strong long-term growth outlook remains intact, the near-term macroeconomic backdrop will likely be dominated by these global headwinds, he said.

"A softer USD, combined with lower interest rates, supports gold and silver by reducing the opportunity cost of holding non-yielding assets. Investors tend to look toward safe-haven assets, strengthening demand for precious metals. Silver benefits from this dynamic as well, though its industrial exposure adds an additional layer of volatility and upside potential," said  Ross Maxwell, Global Strategy Operations Lead, VT Markets.

Maxwell said while the rate cut provides some relief to financial markets, supporting risk assets through lower borrowing costs and improved liquidity conditions, the uncertainty over US growth potential and the limited room for manoeuvre the Fed have for further easing may hold back global investor sentiment. 

"Emerging markets could benefit from a softer USD, but volatility is likely to remain as the global markets adjusts to shifting US economic signals," he said.