When the United States of America sneezes, the world catches the flu. However, when it does well, the world is better off too. The US Federal Reserve chairman Jerome Powell hinted at potential policy rate cuts 2024. The stock market construes that as an indicator that the interest rate cycle has peaked. That means the inflation outlook for the US economy is benign and probably closer to the target of 2% after it peaked at over 9% over the past 12 months. An aggressive hike in interest rates brought inflation in the US economy under control.
Experts worldwide were concerned about the state of the US economy in the context of high-interest rates and slowing economic growth. There was a possibility of a recession in the US, with growth stagnating due to the high cost of money. However, the US economy seems to have dodged the recession bullet. The US Federal Reserve believes that there is adequate momentum in the US economy to create jobs.
With inflation under control, America will likely have a ‘soft landing’ that will not cause a global ripple effect. If the US economy continues to create jobs and imports more goods and services, that is good news for the rest of the world. Many countries rely on exports to the US for growth. A calm debt market, including India, is good news for the world economy. As global inflation subsides, interest rates can be cut to stimulate economic growth. That could mean US businesses can spend more on expansion and consume more goods and services than before. That is good news for Indian companies exporting software services and other manufactured goods to the US.
What it means to your money
The Reserve Bank of India’s monetary policy committee is watching these developments closely. In last week’s meeting, the committee left key borrowing rates unchanged. The committee expects the consumer price inflation in India to remain firmly above 5% in 2023-24. It is expected to subside only in the first half of 2024-25. That means high-interest rates are here to stay. Internal and external factors influence India’s inflation.
Food inflation is a critical internal factor. With weather patterns affecting the harvest season, the RBI is closely monitoring food prices. As crude prices remain volatile, external factors come into play in determining the inflation trajectory. The interest rate you pay on loans is linked to the inflation of consumer prices in the economy.
The change in the US interest rate cycle affects the global money supply. Stock markets in America are surging in anticipation of those rate cuts. Global money managers watch the interest rate cycle closely. When interest rates peak, they switch from a ‘risk on’ strategy to a ‘risk off’ one. That means more money could enter emerging markets or non-dollar assets. The year ahead could see a strong rally in the first quarter across markets. India’s equity markets are already at a record high. Most analysts predict a 12-15% growth in share prices in 2024. That means you need to be watchful. Share prices in India may rally along with the rest of the world, but they will eventually lead to a realistic valuation. Expect volatility in equity markets to intensify in 2024.
The rate-cut cycle will start in America and continue in the rich world. In India, that could happen with a lag. India’s inflation dynamics are linked to domestic factors more than external ones. With general elections slated for May 2024, policy uncertainty will remain till the new government takes office.
In light of these changes in global interest rate cycles, you may want to engage with your professional advisor and identify appropriate assets to invest. Over the next two years, your choice of assets will be necessary. You must understand the implication of falling interest rates on government bond prices. Typically, falling interest rates trigger gains in the net asset values of gilt funds. You may miss a relatively risk-free investment idea in the euphoria of equity markets.