Even though the US Federal Reserve began its easing cycle with an unexpected 50 basis point reduction, Emkay Global stated that even though the Reserve Bank of India has more than 20 days until its next MPC meeting, it still has the flexibility to continue focusing on managing risk and household inflation. And it said that a rate cut is only anticipated in December. A first-rate decrease by December is probable, and the RBI will likely stick to its watch-and-wait policy and concentrate on being “actively disinflationary.” In this cycle, the Fed and RBI are expected to make only small cuts, yet less evidence supports an early decrease.
Just before November’s presidential election, the US Federal Reserve announced its first cut since the pandemic, bringing down borrowing costs substantially. The Federal Reserve said in a statement that lawmakers had voted 11 to 1 in favor of reducing the benchmark lending rate of the US central bank to a range of 4.75 to 5.00 percent. The FOMC concluded that “the risks to achieving its employment and inflation goals are roughly in balance” and decided to ease “in light of the progress on inflation and the balance of risks.”
The easing cycle’s beginning gives developing economies room to begin their own, but given the lack of recent turbulence in the world economy, the RBI is probably going to continue focusing on domestic issues and may drop interest rates for the first time by December.
On the other hand, Jerome Powell stressed that the economy is still doing well and that the rate of lowering will not continue at 50 basis points. Although they both suggested a predisposition in favor of further easing, neither Powell’s press conference nor the post-meeting statement provided any specifics regarding the amount of rate decreases.
At various points, Jerome Powell referred to the most recent dot plot, in which the median dot for this year indicates two more 25bp eases and four more 25bp reductions for next year. Powell emphasized that the excessive easing was not a reaction to an impending recession.
The median projection, which showed little change in the growth and inflation forecast and no change from the June forecast for 100bp of additional easing next year, supported the message that the Fed is quickly recalibrating to a lower level of rates while maintaining its baseline view for the following year.
Powell made the interesting observation that the neutral rate has increased from its pre-pandemic level, with the “long-run” Fed Funds Rate estimate currently standing at 2.9% compared to 2.8% earlier.
