The US Federal Reserve rolled out its third and final rate cut of 2024 on Wednesday, marking a full percentage point of easing since September. This was widely expected; but what was not expected was the Fed’s forward guidance.
Citing inflation concerns and economic prospects, it pared back its previous forecast of four rate cuts in 2025 to just two, sending shockwaves across global financial markets, including India. The S&P 500 index fell nearly 3 percent on Wednesday, its worst tumble since August, while the Dow Jones Industrial Average plunged over 2.5 percent, falling for a 10th straight day - its longest losing streak since October 1974.
Japan’s Nikkei, too, crashed along with major Asian indices in China, Indonesia and South Korea. Back home, the Sensex and Nifty dived about 1 percent, while the rupee hit a historic low of 85.3 against the dollar as foreign investors pulled out of domestic equities.
This was not supposed to happen, as global central banks were about to declare victory over the price-rise monster. If 2023 was the year of the inflation, 2024 was all about interest rate cuts. While many of the monetary policymakers have made a pivot, the question now is whether the pace of rate cuts will be as aggressive as projected until recently.
As it is, some argue that the prevailing monetary tightness is restrictive and is slowing down economies; so, the rates need to come down. Not even half-way through their projected cuts, central banks have now arrived at a point where it’s uncertain how much farther the rates should fall.
Just as Fed chair Jerome Powell noted, policymakers are in a new phase of the monetary policy process and the path remains uncertain - especially on whether the global economy, particularly the US, will make a soft or a hard landing.
The US’s interest rate trajectory and its growth will have a significant bearing on all emerging economies including India. Above all, there are fears about president-elect Donald Trump’s threatened trade tariffs, which will weigh heavily on India’s growth aspirations, and its struggle to create jobs and increase wages.
The RBI’s forthcoming policy meeting in February will be crucial and is being closely watched for signals on inflation, growth and interest rate cuts.