Impact of U.S. Federal Reserve interest rate cut on emerging economies

Source: The post Impact of U.S. Federal Reserve interest rate cut on emerging economies has been created, based on the article “Pivot to watch: The U.S. Fed’s rate reduction could spell relief for developing economies” published in “The Hindu” on 21st September is 2024

UPSC Syllabus Topic: GS Paper3- Economy

Context: The article discusses the U.S. Federal Reserve cutting interest rates for the first time in four years. This aims to maintain a strong labor market and reduce inflation. The move is expected to impact emerging economies, especially in Africa and Latin America.

For detailed information on US Federal Reserve cut interest rates read this article here

Why did the Federal Reserve cut interest rates?

1. The Federal Reserve cut interest rates by half a percentage point, the first cut in over four years.
2. This aims to maintain strength in the labor market while reducing inflation to 2%.
3. Since early 2022, the Fed had raised rates to control the COVID-19-driven inflation surge.
4. Fed Chairman Jerome Powell emphasized that this recalibration will support moderate growth.
5. The rate cut comes with expectations of another quarter-point reduction in 2024.

How does the rate cut affect global economies?

1. Relief for Emerging Market Economies (EMEs): The U.S. Federal Reserve’s rate cut will ease pressure on EMEs, which had suffered from a strong U.S. dollar. As the dollar strengthened, EMEs faced increased debt service costs and inflationary pressures.
2. Benefit for Economies in Africa and Latin America: The rate cut is especially helpful for African and Latin American countries, where high borrowing costs had hampered public investment in infrastructure and services.
3. Increased Capital Flows: According to an IMF blog post, the Fed’s easing may encourage capital inflows into emerging and developing economies, boosting their financial stability.

What is the impact on India?

1. India’s Chief Economic Adviser V. Anantha Nageswaran welcomed the rate cut. However, he said it would only have a limited impact because investors have already been showing interest in India for years.
2. Despite this, India may still see more foreign portfolio investments in its debt markets.

Question for practice:

Discuss how the U.S. Federal Reserve’s interest rate cut impacts emerging market economies.