- On 18th September, the US Federal Reserve lowered its benchmark interest rate for the first time in more than 4 years, with a bigger than usual cut. The key lending rate was reduced by 50 bps to the range of 4.75% and 5% marking the end of monetary tightening cycle.
- Banks said that the move was strong but justified as the inflation was close to its 2% target but remained somewhat elevated whereas job gains have slowed, and the unemployment rate has moved up. Bank’s forecast signalled further rate cuts during the year.
- The decision to cut rates steeply by 50 bps instead of 25 bps was seen a controversial as historically such moves are taken at a moment of crisis like Covid pandemic or 2008 financial crisis. Though US economy growth of last few months shows that US economy is resilient for the time being.
- While US Fed rate cuts are aimed only at US economy, it generally has global implications.
Global Rate Cuts:
- The move followed rate cuts by other central banks in Europe due to easing of inflation. Earlier in August Bank of England cut interest rates for the first time in 2020.
- The market will also expect the Reserve Bank of India (RBI) to consider Interest rates cut to keep pace with the global trends. The favorable retail inflation numbers might help the argument but elevated food prices would remain a concern for RBI.
Impact:
- The move is a relief for US borrowers dealing with highest interest rates in 20 years and is supposed to give pace to economy and job market.
- The move should theoretically bode well for the emerging markets like India. In past two years foreign money was pulled out of emerging economies because of higher interest rates in US. However now, with US bond yields going down, the investors would invest money in the emerging markets to get better returns. Thus, US Rate cuts may trigger a rally in Indian Stock markets.
Acknowledgements:
RBI Bulletin (www.bulletin.rbi.org.in), SEBI (www.sebi.gov.in), NSE (www.nseindia.com), BSE (www.bseindia.com)
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