While the US Federal Reserve lowered its policy interest rate by 25 basis points (bps), the second straight reduction in 2024, just a day after Donald Trump’s victory in the US presidential election, economists and experts said that RBI, back home, is likely to maintain the status quo in December. Rakesh Pujara, Smallcase Manager and Founder at Compounding Wealth Advisors LLP, said, “Back home, the RBI will be meeting next month to unveil their monetary policy meeting. While the central bank has committed to support the economy, the retail inflation saw an uptick. Extended monsoon’s impact on crop and supply side constraints has led to a negative impact on inflation. We expect the central bank to act on economic data and high frequency indicators. They are likely to maintain the status quo in December, with chances of a rate cut on Q1CY25.”
However, a report by Angel One Wealth stated, “Fed has delivered, as guided. We reiterate that given the US macro indicators, the rate cuts now are rather pre-emptive. India, on the other hand, is facing sticky food inflation but also lower growth possibilities. RBI is facing the trilemma between growth, inflation and currency movements. In that sense, a domestic rate cut will help.”
Earlier on Thursday, the Federal Open Market Committee (FOMC) decided to lower its policy interest rate by 25 bps continuing a shift towards monetary easing aimed at supporting economic stability. The decision, announced within 48 hours after the US elected Donald Trump as the next President, lowered the rate target to a range of 4.5 per cent to 4.75 per cent.
US Fed Chair Jerome Powell said, “Today the FOMC decided to take another step in reducing the degree of policy restraint by lowering our policy interest rate by a quarter percentage point.” He added, “We continue to be confident that with an appropriate recalibration of our policy stance, strength in the economy and labour market can be maintained with inflation moving sustainably down to 2 per cent.”
During a press conference, Powell said that the American central bank would be watching economic data while deciding whether they will go ahead for a final rate cut in December.
In response to questions around the Trump victory, Jerome Powell stressed that the election will have no near-term effects on policy decisions, and largely avoided getting into election-related risks to the outlook. Powell also said he would not resign if asked by the president-elect, adding that firing any of the Fed’s seven governors was “not permitted under the law”.
Jerome Powell told the reporters at the press conference, “In the near term, the election will have no effects on our policy decisions”, maintaining that there was still uncertainty about what Donald Trump’s actual economic agenda would be. “We don’t guess, we don’t speculate, and we don’t assume,” he said.
The US Fed, in its previous policy in September, cut its key rates by a significant 50 basis points (bps) to 4.75-5 per cent. This rate cut had come after a gap of four years. The US central bank is committed to supporting maximum employment and returning inflation to its 2 per cent target.
Here is what economists and experts think about the recent rate cut by the US Fed:
Deepak Agrawal, CIO Debt, Kotak Mahindra AMC
Spike in long term yield since the Sep 24 policy has led to tightening of financial conditions in the US. Highlighting that the risk to both growth and inflation being evenly balanced, FOMC cut rates by 25 bps from 4.75-5.00 to 4.5-4.75 in line with market expectations. We continue to expect a 25 bps rate cut in Dec 24 policy, however we think given the likely increase in fiscal/ tariff in 2025 and its impact on inflation the end 2025 fed rate guidance may be revised higher from 3.40 to 3.70 in the Dec 24 meeting.
Vinit Bolinjkar, Head of Research, Ventura Securities
The 25 bps Fed rate cut was along expected lines, however cautioning that the future rate cuts would be more data driven. While traders are anticipating a 25 bps further cuts, Fed Chief Jerome Powell had said earlier that the neutral rate would be relatively higher. After having rallied substantially over the past few days the Asian markets are offering negative cues as we are about to open for trade here in India. It raises the probabilities that the RBI would cut rates when it meets in December.
Angel One Wealth
FOMC’s rate easing cycle continues as it unanimously shaved the benchmark by 25 bps, down to a range of 4.5-4.75%, albeit in line with expectations. The FOMC concluded that the labour market is not a source of inflation. At 4.1%, the unemployment rate is manageable. The jobs data was affected by Boeing layoffs as well as a hurricane and the Fed has rightly adjusted the numbers for one-offs while taking a policy stance. The bigger culprit is return of inflation expectations and Fed takes cognizance of higher core inflation and considers the inflation to be on a path of 2% but staying elevated. We believe the US has landed softly, which means rate cuts are now pre-emptive.
Madhavi Arora, Lead Economist, Emkay Global Finances
Early this year, we had called out for no cuts by the Fed and RBI in CY’24. While Fed hastedly cut more than required, for the RBI, Dec cut call is still tricky and may possibly lead to a shallower rate-cut cycle, following the Fed next year. Thus, mild Gsec bear flattening may make a comeback. Of course, the implications of higher US term premia would possibly lead to higher global rates in the medium term. However, India’s current favorable DD-SS structure of sovereign papers may still keep it relatively better placed than other EMs, but not directionally. But the spillover of bond/FX volatility via the global financial markets route could also mean the aim of financial stability may even precede inflation management for the RBI in some cases.
Rohit Arora, Co-Founder & CEO, Biz2Credit and Biz2X
The Federal Reserve’s rate cut will potentially reduce borrowing costs, benefiting consumers and businesses alike. For consumers, cheaper loans mean more disposable income, boosting spending. For businesses, lower rates ease access to financing, encouraging investments and driving expansion. This environment will also set the stage for heightened M&A activity, as companies capitalize on affordable capital to pursue acquisitions, thereby consolidating resources and enhancing market competitiveness. By aiming for economic stability amid a softening labor market, the Fed is fostering conditions for steady growth, balancing its dual mandate of employment and inflation control while supporting sustainable economic expansion.