The US Federal Reserve has cut its key interest rate by 25 basis points amid shifting economic risks and a weakening job market, despite persistent inflation.
The US Federal Reserve has cut its key interest rate by 25 basis points, lowering the federal funds target range to 3.5%–3.75%. This is the Fed’s second rate cut in three months after a long pause that lasted from December 2024 to September 2025. In its statement, the FOMC said the decision reflects shifting economic risks. “In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range...by 1/4 percentage point,” the Fed noted.
Why the Fed Is Cutting Rates Now
The latest move comes at a time when the US economy is flashing mixed signals.
- Inflation is still higher than the central bank would like
- The job market, once the strongest pillar of the recovery, is now weakening
Fresh data from the US Bureau of Labor Statistics showed unemployment rising to 4.4% in September, even though the economy added 119,000 jobs. The federal government shutdown during the month also weighed on hiring.
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This has pushed the Fed into a careful balancing act as it attempts to cool inflation without hurting employment further.
Not an Aggressive Cutting Cycle, Yet
Despite back-to-back rate cuts in October and December, Fed officials have stressed they are not on autopilot. Every future decision will depend on data, especially as the US enters 2026 with lingering uncertainties in inflation, jobs, and consumer spending.
Market expectations remain high, though. The CME FedWatch Tool suggests an 87% chance of another 25 bps cut at the next meeting, even as some analysts debate the possibility of a larger 50 bps move.
How Much Does This Matter to India?
For India, the impact of the latest Fed cut is important but limited, say experts.
Market veteran Ajay Bagga said Indian markets remain well positioned despite muted immediate reaction.
“Overall, with positive outcomes from the RBI and the US Fed, Indian markets are well positioned for a year-end upswing,” he said. Bagga expects December quarter earnings to rebound, driven by the post-GST-cut consumption boost.
However, he warned that strong fundamentals are being overshadowed by:
- Persistent FPI selling
- Heavy primary market and OFS supply, which is draining liquidity from secondary markets.
Global Rates Are Cooling And That Helps India
According to Rajesh Palviya, SVP – Research at Axis Securities, the Fed’s decision is broadly supportive for investors.
“For global equities, lower yields typically lift risk appetite and favour both growth and cyclical assets,” he said.
From India’s point of view, he added:
- A softer Fed reduces worries about a strong US dollar
- It creates a healthier environment for the rupee and domestic liquidity
- Sectors like financials, consumption, and rate-sensitive stocks are likely to stay resilient
However, Palviya cautioned that some volatility is unavoidable given the uncertainty around the Fed’s 2026 policy direction.
