US Fed's cuts interest rate second time consecutively, to boost emerging markets

The US Fed went ahead with a second consecutive rate cut this year of 25 basis points, which may turn out to be bullish for emerging markets like India, market experts said on Friday.

It wasn't a surprise when the US Fed cut interest rates by 25 basis points (bps) to 4.75 per cent and given the US macro indicators, the rate cuts now are rather pre-emptive.

The US Fed's move came amid cooling inflation and a weakening labour market, marking the second rate cut in this easing cycle.

"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 per cent objective but remains somewhat elevated," the Federal Open Market Committee (FOMC), the central bank's policy-setting body, said on Thursday in a statement.

In support of its goals, the committee decided to lower the target range for the federal funds rate by 0.25 percentage points to 4.5 per cent to 4.75 per cent, the statement said. The Fed's latest decision came after a weak employment report, which showed that US employers added only 12,000 jobs in October, amid a cooling labour market.

This slowdown was exacerbated by the strike and impact of recent hurricanes, Xinhua news agency reported. The latest report also revised down employment for August and September, to a gain of 78,000 and a gain of 223,000, respectively. With these revisions, employment in the two months combined is 112,000 lower than previously reported.

After its September 17-18 meeting, the central bank slashed the target range for the federal funds rate by 50 basis points, which marked the first rate cut in over four years and signalled the start of an easing cycle. At a press conference after the Fed's two-day policy meeting, Fed Chair Jerome Powell noted that inflation has eased significantly over the past two years, but core inflation remains somewhat elevated.

Total Personal Consumption Expenditures (PCE) prices -- the Fed's preferred inflation gauge -- rose 2.1 per cent over the 12 months ending in September. Excluding the volatile food and energy categories, core PCE prices rose 2.7 per cent. "The job is not done on inflation," said Powell.

When asked whether he would step down if President-elect Donald Trump requested his resignation, Powell responded with a firm "no". Asked whether he believed the coming President had the power to fire him, the Fed chair replied, "Not permitted under the law." 

Boost for India?

"India, on the other hand, is facing sticky food inflation but also lower growth possibilities. The RBI is facing the trilemma between growth, inflation and currency movements. In that sense, a domestic rate cut will help," according to a note by Angel One Wealth.

The RBI Governor Shaktikanta Das this week said that although the central bank had shifted towards a softer neutral monetary policy stance to spur growth, this did not mean that an interest rate cut would happen immediately.

"A change in stance doesn't mean there will be a rate cut in the very next monetary policy meeting," he said, adding that there were still significant upside risks to inflation and "a rate cut at this stage would be very risky".

The RBI, at its recent monetary policy review, kept interest rates unchanged for the 10th straight meeting, but switched its monetary policy stance to "neutral" from "withdrawal of accommodation".

Meanwhile, the Fed's second consecutive rate cut this year of 25 basis points comes on the heels of a highly eventful week, preceded by 's election victory and rate cuts by the Bank of England.

Apurva Sheth, Head of Market Perspectives and Research , SAMCO Securities said that although the Fed Chief is hopeful of taming inflation back to the 2 per cent target soon, thus not warranting a restrictive policy.

"The bond yields have cooled off and slipped below the 4.335 per cent mark. This should be bullish for emerging markets like India," Sheth said, adding that it seems that the market is anticipating slower rate cuts going ahead and maybe there are even chances of inflation rising.

(With inputs from IANS)