Thanks to 15 months of carefully calibrated high interest rates, the US Fed seems to have achieved a soft-landing for the US economy — something very few people expected just a couple of years ago.
Last week, Jay Powell, Chairman of the United States Federal Reserve, announced another 25 basis point cut in the Federal Funds Rate (FFR). The FFR is the interest rate at which commercial banks borrow from each other. The Fed can make this rate go up or down by tweaking the overall supply of money. This was the second successive Fed meeting where a cut was announced; it had cut the FFR by 50 basis points in September. These cuts come after a period of a severely tight monetary policy since March 2022 when inflation hit historic highs in the US. Contrary to what it may look like — since the US has just voted for Donald Trump as president again — this was one of the easiest decisions for the Fed. That is because, as Powell said in his press statement, the US economy is “strong overall” and “has made significant progress toward our goals over the past two years”. The labour market has cooled from its formerly overheated state and “remains solid”. Inflation has eased substantially from a peak of 7 per cent to 2.1 per cent as of September.
Thanks to 15 months of carefully calibrated high interest rates, the US Fed seems to have achieved a soft-landing for the US economy — something very few people expected just a couple of years ago. “We continue to be confident that with an appropriate recalibration of our policy stance, strength in the economy and the labour market can be maintained, with inflation moving sustainably down to 2 per cent,” Powell said. However, the Fed’s path going forward is unlikely to be as easy. That’s because the second Trump administration is likely to bring about a great policy disruption. For one, Trump has promised to slap prohibitively high import tariffs. If he follows through with it, such a move will not only drag down growth and employment but also lead to a sharp spike in inflation. The other big policy challenge will be Trump’s fiscal boost to the economy via tax cuts. Consequently, a further increase in deficit will also push up inflation.
From India’s perspective, on the face of it, a cut in US interest rates should help attract more capital into the country — be it stocks or bonds or direct investment. Similarly, a cut in US interest rates should also weaken the US dollar against other currencies such as the Indian rupee. However, with the return of Trump at the helm, and the likely focus of his administration to boost American growth and productivity, it is quite possible that the dollar remains strong as money actually flows from the rest of the world into the US.
