The most influential central bank in the world is debating the merits and demerits of an interest rate cut in the biggest economy of the world – a decision that is bound to influence the course of events and investments in different markets of the world including India. Jerome Powell, the chairman of the US Federal Reserve, popularly referred to as the US Fed, is expected to announce the decision of the FOMC (federal open market committee) that will meet over November 6-7 to take the crucial decision.
Donald Trump, the businessman, favours low interest rates. Trump’s return to the White House becomes significant since he is widely expected to impose/increase import tariffs on goods that has been estimated to add $2 trillion to the public exchequer. His policies also include tax cuts and higher spending. According to reports, these could fuel inflationary pressures to the US economy. Significantly, the US Fed has trimmed the interest rates by a bigger-than-expected margin only after inflationary pressures have been reined in.
What is the Federal Reserve current rate?
The Fed rate currently hovers between 4.75%-5.0%. Almost like the Repo Rate of the RBI, this rate determines the rate of interest at which banks charge interest to each other. However, it acts as a reference point or the fountainhead interest rate which determines other rates on home loans, auto loans, personal loans and also loans to business enterprises. This rate was arrived at after the US Fed reduced interest rates by 50 basis points in September. That marked easing monetary policy for the first time in 4 years.
Will the Fed cut rates now?
The FOMC of the US Fed meets 8 times a year. According to reports, it might not settle for a rate cut in this meeting but might opt for a 25-basis point cut in its December meeting. In January there might not be another cut but there could be multiple rate cuts throughout 2025. On the other hand, a few reports have suggested that a 25-basis point rate cut might take place today.
Effect of US Fed rate cut on India
Usually, a Fed rate cut weakens the US dollar which, in turn, indicates that the Indian rupee could appreciate against the dollar. Any rate cut makes returns lower and less attractive to investors. This could drive foreign institutional investors to other emerging markets in search of better returns.
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