The Fed has done it again. The third rate cut in a row. The first two were of 50 bps and 25 bps each, and the third one too is of 25 bps. The fed Funds Rate has been cut to 4.25% to 4.50%. This action is the direct result of lower inflation and the realization that though the economy is growing, the pace of expansion has been arrested to a certain extent by the high interest rates. The reality is that when economic expansion gets truncated it affects every part of the economy. One of the early indicators of this was the rising unemployment. The thirty-year mortgage rate which had touched 8% has moderated as of now but it still remains a shade higher relative to the sustainable mortgage rates prevalent in periods of moderate economic expansion in the last two decades.
This series of rate cuts also comes in the wake of a number of similar actions from prominent central banks like the ECB, the BOE, PBC, and the Swiss National Bank. Central banks have been responding quite swiftly to the moderating inflation levels, and the gradual sluggishness in economic growth that is gradually setting in.
It may not be very out of place for the RBI too to consider a rate cut in the next Monetary Policy Committee meeting. While headline inflation may be sticky at elevated levels, it is a consequence of seasonal price rise in certain essential items like onions and tomatoes, and the food basket as a whole. At the same time, growth has dipped with the last GDP growth rate coming in at 5.40% as against the forecasts for the whole year at 7.20% as per original estimates. Rate action is required so that credit becomes cheaper, and it gives some boost to consumption and spending both by private individuals and businesses.
The Fed Statement reads like this: “Since earlier in the year, labour market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.”
The Emkay Wealth view has been that the Fed Funds Rate is likely to touch the 4%-mark resultant to the rate cuts by Q1 of 2025. This is quite likely. The Fed in its characteristic style has put it that any further rate action will be data dependent, we do not expect any dramatic changes in the current economic environment which may obviate the need for a further rate cut.
