Mumbai: The US Federal Reserve announced its sixth policy decision for 2024 on September 18 after a two-day Federal Open Market Committee (FOMC) meeting and slashed the benchmark interest rate by 50 basis points (bps) or (½) half a percentage point to 4.75 per cent-5 per cent for the first time in four years, broadly in line with Wall Street estimates.
US Fed policymakers see the benchmark interest rate falling by another half-point (50 bps) by the end of this year, another full percentage point in 2025, and a final half-point reduction in 2026 to end in a 2.75 per cent-3.00 per cent range. One bps is equal to one hundredth (1/100) of a percentage point.
US inflation has tumbled from a peak of 9.1 per cent in mid-2022 to a three-year low of 2.5 per cent in August, not far above the US Fed’s two per cent target. With inflation barely above their target level, US Fed officials have been shifting their focus toward supporting a weakening job market and achieving a rare “soft landing,” which curbs inflation without causing a sharp recession.
In its previous meeting, Fed chair Jerome Powell-led rate-setting panel unanimously voted to keep the policy rate at the 23-year high in the range of 5.25 per cent—5.50 per cent. The US central bank maintained borrowing rates steady for 14 straight months to bring down inflation in the world’s largest economy.
After raising the policy rate by 5.25 percentage points since March 2022 in one of the swiftest Fed reactions to combat the worst outbreak of inflation in 40 years, the central bank has held the rate on hold since July 2023 to anchor in high inflation and consistently bring it down toward the two per cent target range.
The 50 bps rate cut is a bold stance by the US Fed to revitalise their subdued economy, which will in turn open the door for other global central banks, including RBI to kickstart the softer interest rate regime. Given that India’s inflation rate has also been on the mend for the past few months, we expect the RBI to announce rate cut in its policy meeting next month, which will benefit few sectors that are leveraged such as metals and infrastructure. However, the rate cut may hurt the banking sector, which is already struggling with lower CASA, and the falling interest rate scenario going ahead could see customers stay away from bank deposits, says Vijay Bharadia, Founder at Wallfort Financial Services Ltd.
