Why US Markets Zoomed Despite US Fed holding Rates?

1 Aug 2024 , 11:35 AM

On July 31, the US Federal Reserve announced that its Federal Open Market Committee decided to keep its benchmark target interest rates unchanged at 5.25-5.50%, the highest levels in around two decades. Despite this, the S&P 500, one of the key US stock benchmarks, jumped nearly 1.6% following the FOMC decision. The market’s positive reaction was not due to the decision to maintain rates but rather to comments made by Fed Chair Jerome Powell during a post-policy press conference.

“If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September,” Powell said. The “test” he referred to was data showing a slowdown in inflation and a cooling in economy. The prospect of a potential rate cut in September was enough to boost market sentiment, leading investors to anticipate that a rate cut could be imminent.

This optimism in the US markets also influenced the Indian markets, where the key benchmark Nifty 50 crossed the 25,000-point mark.

Why Are US Interest Rates Important for India?

US Treasury securities are considered one of the safest investment instruments in the world. When US Treasury yields are high, they attract investors, leading to a reduction in inflows into emerging markets. Consequently, countries like India, without saying so, try to maintain a spread over US interest rates to ensure there is no flight of capital. This spread helps to keep investors interested in Indian markets despite higher US rates.

Apart from the fixed income markets, equities also attract more interest from foreign investors when rates in the advanced economies are lower.