Policy Rate Hikes and Cuts

This week’s FOMC decision was not an easy choice. Our goals are in conflict. Inflation is above target, the labor market is softening, and there are risks to both sides of our mandate—maximum employment and price stability.   Two charts explain why I ultimately favored a rate cut.   The first shows the damaging cost of high inflation. It has chipped away at real earnings and weakened household purchasing power. Many Americans are still trying to catch up.    So, the FOMC must continue to bring inflation down. Anything other than 2% is not an option. But it matters how you get there. This means we cannot let the labor market falter.   Real wage gains come from long and durable expansions. And the current expansion is still relatively young, as shown in the second chart. Holding policy too tight can cause undue harm to American families and leave them with two problems: above-target inflation and a weak labor market.   Congress gave us two goals. And our job is to meet both of them. The recent policy decision puts us in a good place to achieve that.

Today marks a decisive turning point for India’s macro-economic direction! The RBI’s Monetary Policy Committee has cut the repo rate by 25 bps to 5.25%, upgraded FY26 growth to 7.3%, and brought inflation guidance down to 2%. What this means and why the shift matters: 1. Relief for borrowers & businesses A lower repo rate typically eases borrowing costs. Expect improved affordability for consumers and enterprises, which can lift consumption and support capex cycles. 2. A rare “Goldilocks moment” With inflation contained and growth estimates rising, we’re seeing a compelling intersection of price stability and demand-side stimulus — a combination that markets don’t get often. 3. Sectoral tailwinds Real estate, infrastructure and discretionary categories often feel the weight of high interest rates. With easier financing conditions, these sectors may see revived investments, improved hiring, and stronger demand. 4. A disciplined policy stance Despite the cut, RBI’s tone remains measured. The stance is neutral, inflation is modest, and the central bank retains room for future data-driven adjustments. From a macro lens, this isn’t merely a rate cut it’s a signal that India is entering a phase where stability and sustained growth can coexist without inflationary overshoot. What I’m tracking next: Transmission of rate cuts to retail lending, movement in fixed capital formation in Q3, consumption patterns in urban + semi-urban pockets, and MSME credit flow. Is this the start of a new growth cycle? I’m inclined to think yes but the next two quarters will tell us more.

The Reserve Bank of India’s bold move to slash the repo rate by 50 basis points to 5.5%—its third consecutive cut this year—signals an aggressive pivot toward growth stimulation amid easing inflationary pressures. With food inflation softening and core inflation expected to remain benign, the RBI seized the opportunity to front-load monetary easing. The change in policy stance from “accommodative” to “neutral” reflects a recalibrated strategy: while liquidity support continues, the RBI is preparing to remain flexible should inflationary threats re-emerge. The simultaneous reduction in the Cash Reserve Ratio, expected to release ₹2.5 lakh crore into the system, reinforces the central bank’s intent to amplify credit flow and investment activity across sectors. This decision has wide-reaching consequences. Borrowers, especially in the housing and auto sectors, will see substantial relief through reduced EMIs—potentially saving thousands monthly—spurring consumer sentiment and retail spending. On the flip side, fixed deposit investors are already feeling the pinch of falling returns, a trade-off the RBI seems willing to make for broader economic revival. Stock markets have cheered the move, with the Nifty and Sensex posting gains as financials and real estate stocks surged. The message from RBI is clear: with inflation under control and global headwinds persisting, India is choosing to bet on domestic demand, and this rate cut is a calculated push to accelerate the country’s growth engine while keeping inflation in check. #LinkedinNews #Finance #RBI #SanjayMalhotra #MPC #RepoRate

Rate-Cut Chatter… Real-World Decisions. Inflation cooled enough that markets now see a September Fed cut as highly likely (most pricing a 25 bps move), while some are calling for a “jumbo” 50 bps start. Treasury Secretary Scott Bessent floated the idea this week on Bloomberg, though several Fed watchers warn a half-point would look “panicky,” and policymakers say more data still matters. ⚠️ Why this matters for founders: cheaper capital can be a tailwind, but not a strategy. Use the rate debate to sharpen your playbook: 🔹 Plan for three scenarios, not one. Baseline: 25 bps cut. Upside: 50 bps. Tail: no cut if incoming data re-heats. Pre-decide how hiring, capex, and financing change under each path 🔹 Sequence capital, don’t spray it. If the cost of capital dips, rank uses by time-to-cash-flow & risk: - Extend runway / refinance expensive debt - De-bottleneck production / GTMs already working - Fund new R&D bets with explicit stage-gates 🔹 Discipline matters. Assume today’s easing can reverse; design projects to clear hurdle rates that survive a rate back-up. 🔹 Strategic money > hot money. In easing cycles, velocity returns to term sheets. Prioritize investors who also deliver access: supply chains, distribution, co-dev. (As a CVC, that’s where we lean in with our TDK Goodness.) 🔹 Control the controllables. You can’t steer the Fed. You can tighten your unit economics, stress-test vendors, and stage scale-up so each tranche unlocks measurable productivity. Where I see teams applying this well: capital-intensive builders who treat rates as context, not a crutch. For example, Peak Energy (grid-scale sodium-ion) sequences manufacturing scale with supply resilience; Ascend Elements (domestic battery materials) links project finance to offtake sizing; Agility Robotics and ANYbotics time factory capacity to validated demand; Groq pursues efficiency-led AI inference economics that are less rate-sensitive than cloud-only scale. Different sectors, same discipline: earn your next dollar of capex with proof, not vibes. My take as an investor: welcome a cut, plan for less, execute the same. Easing can open windows for M&A, growth equity, and project finance… but it won’t fix poor sequencing. Decide now what you’ll accelerate on 25 bps, what you’ll only green-light on 50, and what you’ll never pursue. Then stress-test that plan with your board. 💬 Curious to hear your thoughts on this: https://lnkd.in/g-xFmqtD

All eyes are on the Fed’s anticipated rate cut this month, the most significant event shaping market sentiment. We’ve been hearing a lot of concerns that rate cuts signal an economic slowdown and could turn into a negative event for the markets. But is that really the case? In fact, the impact of rate cuts is highly contextual. According to a recent report by the Franklin Templeton Institute, history shows that the effect of rate cuts varies greatly depending on the economic conditions at the time. 📉 𝐑𝐚𝐭𝐞 𝐂𝐮𝐭𝐬 𝐢𝐧 𝐑𝐞𝐜𝐞𝐬𝐬𝐢𝐨𝐧𝐬 𝐯𝐬. 𝐄𝐱𝐩𝐚𝐧𝐬𝐢𝐨𝐧𝐬: • 𝐑𝐞𝐜𝐞𝐬𝐬𝐢𝐨𝐧𝐚𝐫𝐲 𝐑𝐚𝐭𝐞 𝐂𝐮𝐭𝐬: During recessions, rate cuts can initially cause a dip in equity markets. In these periods, equities have historically seen short-term declines, with Treasuries often outperforming as a safe haven. It’s a defensive play, indicating the markets brace for further economic deterioration. • 𝐄𝐱𝐩𝐚𝐧𝐬𝐢𝐨𝐧𝐚𝐫𝐲 𝐑𝐚𝐭𝐞 𝐂𝐮𝐭𝐬: However, when rate cuts occur during economic expansions, the story is entirely different. The report shows that equities tend to rally significantly after rate cuts in expansions, with growth and small-cap stocks leading the way. Historically, the S&P 500, Nasdaq, and Russell indices have all performed exceptionally well following expansionary cuts, with minimal drawdowns. 📊 𝐊𝐞𝐲 𝐒𝐭𝐚𝐭𝐬: • During recessions, equities declined by an average of 4.96% in the first three months post-rate cut, but then rebounded over the next 6-12 months. • During expansions, equities often surged, with the Nasdaq gaining 25.33% over the year following the first rate cut, while the S&P 500 rose 16.66%. So the big question becomes: Has the recent rate hike cycle slowed growth enough to push us toward a recession, or do we still have room for economic expansion? This is the critical factor that will determine whether the upcoming rate cut will spark a bull run or trigger a market pullback. 📈 𝐖𝐡𝐚𝐭 𝐇𝐚𝐩𝐩𝐞𝐧𝐬 𝐍𝐞𝐱𝐭? Historically, during rate-cutting cycles, value stocks perform well initially, but growth stocks take over as the market gains momentum. That’s exactly what we’re seeing right now—growth stocks have been outperforming, a positive sign that the economy could still have room to grow. More than anything, what will truly define the trajectory of the markets is how well the Fed manages to navigate the “soft landing”—balancing the slowing inflation without stalling economic growth. This delicate balance will be crucial in determining whether the upcoming rate cut sparks growth or reinforces recession fears. #MarketInsights #RateCuts #Investing #FedPolicy #GrowthStocks #EconomicExpansion #StockMarket #Treasuries

The Fed is expected to begin cutting rates this week. CME FedWatch shows a 100% probability of a rate cut with the market now favoring a 50 basis point cut. At the end of last week expectations were evenly balanced between a 50 basis point cut and a 25 basis point cut. Only a week ago, market expectations heavily favored a 25 basis point cut. August Consumer Price Index (CPI) and Producer Price Index (PPI) reports both showed year-over-year inflation is slowing, but CPI remains stubbornly high, largely due to the methodology used to calculate shelter costs. Reported CPI shelter costs rose 5.2% year-over-year as of August, resulting in a 2.5% increase in headline CPI. Back in April, Roofstock released a research report in which we adjusted March inflation data for more current market-based measures of rent from Rental Genome and other sources. This analysis showed year-over-year CPI growth of 2.3% versus a reported 3.5%. We have updated that analysis in the accompanying table. After our shelter adjustments, year-over-year August CPI growth was below the Fed’s target, at 1.8%. Our research shows shelter inflation is running at 3.0%, compared to the 5.2% increase reported by the BLS. How the Fed views the latest inflation data and how strongly they are considering market-based measures of rent remains to be seen. Using the Phillips curve to assess monetary policy relative to current labor market conditions and our inflation measure would point the Fed to a 50 basis point cut. As I noted recently, the labor market has been consistently slowing, with rolling three-month average job gains decreasing for the past five months and rolling three-month average unemployment rising for the past seven months. The Fed has made it clear they want to avoid significant deterioration in the labor market and their margin for error here is narrowing. A 25 basis point cut could still be in play considering the Fed’s desire to show conviction that its policy stance has been appropriate. It will also not want to appear to be tipping the scales prior to the upcoming presidential election. Fed governors may also be concerned about reported shelter inflation and the risk of acceleration in those numbers if they cut too quickly. A low unemployment rate and rising wages would give them some cover here. In any case, the time for rate cuts has arrived. The April report on inflation from Roofstock Research can be found here: https://lnkd.in/emm5UySA

I was awed with the policy announcement – clear, strong and confident – changed the mood and provides tailwind just when needed. A 100 bps CRR cut, front-loaded 50 bps cuts, supportive and purposeful, shows clear intent: to bolster growth given global uncertainties. This wasn’t just a signal—it was action. And left me clear that the next action has to be from all of us. From a banking perspective, releasing ₹2.5 lakh crore into the system is a big move. It boosts liquidity, supports lending, and helps reduce customer pricing. What’s often missed is the impact on the government's borrowing cost. With lower yields and refinancing at better rates, this could mean savings of ₹30,000–40,000 crore—a quiet but powerful boost to fiscal space and spending ability. I am hoping the rating agencies would take serious note of this forward looking and confident steps and revise India ratings upwards soon. 6th June 2025 policy announcement will have its place in history.

Forward markets are pricing in a single 25‑basis‑point rate cut later this year, most likely in July or September. But focusing on one move understates how constrained policymakers really are right now. The war in Iran has created near-term inflationary risk, which implies no rate cuts for the first half of 2026. In my latest analysis for The Real Economy, I revisit the Fed outlook against three data-driven scenarios: 1. A base case (60% likelihood) where expansionary fiscal policy keeps growth intact, #inflation runs between 2.8% and 3.2%, and unemployment stabilizes near 4.4%. 2. A dovish scenario (15% likelihood) where weaker spending and labor conditions could pull 50 to 75 basis points of cuts forward. 3. A hawkish scenario (25% likelihood) where inflation remains above 3.2%, keeping both cuts and hikes off the table. None of the four policy-rate models we track suggest a cut is needed today, even though our preferred model indicates the current policy rate may be 75 to 100 basis points too high. For executives and investors, this environment calls for stress-testing decisions across multiple paths, not anchoring to a single forecast. Hiring, capital allocation and investment strategies will all hinge on how inflation and labor data evolve in the months ahead.

Recent data releases give the green light to a September interest-rate cut from the US Federal Reserve, in my view, and the latest job market report was the likely clincher. While inflation is not yet back to target, it remains within striking range, and the Fed is likely to take comfort from signs of cooling of wage growth.   As could be expected at such a meaningful turning point, a number of investors and analysts are rushing to anticipate a sharp policy correction. However, I don’t think these predictions are justified by the current economic outlook. The unemployment rate continues to point to a rather healthy labor market, consumer spending is holding up well, and fiscal policy remains exceptionally loose and seems unlikely to tighten any time soon.   I therefore remain of the view that we will see a gradual easing of policy with rate cuts totaling somewhere around 125-150 basis points, leaving the fed funds rate at or above 4%. Over the longer term, I see real short-term rates closer to their long-term 2% average than the near-zero level of the recent past. #fixedincome #investmentstrategy #interestrates #fed #inflation #monetarypolicy

The Fed split 10-9 on rate cuts. That one-vote margin says everything. Fed minutes released Wednesday showed officials agreed on cutting rates in September, the fight was over how much. They approved a quarter-point cut to 4%-4.25%, but the “dot plot” split 10-9 on whether to cut twice more this year or three times. That’s not consensus. That’s a coin flip. Stephen Miran, the new Fed Governor who took office hours before the meeting, was the lone dissent, pushing for a half-point cut and a much more aggressive easing path than the rest of the committee. The driver? Labor market concerns. Officials see it weakening, with downside risks to employment rising even as inflation trends toward the 2% target. Most want policy moving toward “neutral,” but some argued financial conditions don’t suggest policy is restrictive, making the case for caution. Tariffs got airtime too. Consensus view: Trump’s levies push prices higher short-term but won’t create lasting inflation. Now the wildcard: the government shutdown. If it doesn’t end before the October 28-29 meeting, the Fed makes decisions without key data on inflation, unemployment, and spending. Labor and Commerce have shuttered. No data, no clarity. Markets price in near-certain cuts in October and December. But flying blind changes everything. The Fed is threading a needle between a weakening labor market and uncertain inflation, with a one-vote margin separating dovish from more dovish. That’s flexibility, not strength. Watch the data. Or watch whether we get it at all. #FederalReserve #InterestRates #Economy #MonetaryPolicy