US Federal Reserve cut interest rates

Source: The post US Federal Reserve cut interest rates has been created, based on the article “Why US Fed cut interest rates, how India could be impacted” published in “Indian Express” on 20th September is 2024

UPSC Syllabus Topic: GS Paper 3- Economy

Context: The article explains that the US Federal Reserve cut interest rates to support economic growth. This decision impacts global markets, including India. Lower US rates encourage investment in India, affect the rupee’s value, and influence the Reserve Bank of India’s policies.

For detailed information on How Interest Rates in US impacts India read this article here

Why did the Fed cut interest rates?

1. The Fed cut interest rates by 50 basis points to support economic growth as inflation moderated and unemployment increased.
2. Earlier, the Fed had raised rates to 5.5% to control inflation caused by post-pandemic recovery and supply disruptions due to the Russia-Ukraine war.
3. Inflation peaked at 9%, but by July 2023, it began to decline towards the 2% target.
4. Rising unemployment, which reached 4.4%, indicated that the restrictive monetary policy was affecting jobs.
5. Fed Chair Jerome Powell acknowledged that earlier unemployment and inflation data could have led to rate cuts in July itself.

What is the Fed’s plan moving forward?

1. The Fed plans to gradually cut interest rates over the next few years to stabilize the US economy.
2. They will cut by another 50 basis points in 2024, followed by 100 basis points in 2025, and another 50 basis points in 2026.
3. The goal is to achieve a “soft-landing“—reducing inflation without triggering a recession.
4. As inflation has moderated, the Fed aims to balance growth and unemployment.
5. Despite past concerns, the US economy continues growing and unemployment remains relatively low. However, future policies, such as tariffs by presidential candidates, could disrupt these projections.

How will India be affected?

1. India may attract more foreign investment as lower US rates encourage global investors to borrow in the US and invest in countries like India, boosting stocks, debt, and FDI.
2. A weaker US dollar could strengthen the rupee, benefiting importers but negatively affecting exporters.
3. The RBI is under pressure to cut interest rates but is unlikely to follow the Fed’s lead due to differing inflation targets.
4. Repeated rate cuts in the US could lead to a stronger rupee, which helps importers by reducing costs but harms exporters by reducing their competitiveness.

Question for practice:

Examine how the US Federal Reserve’s decision to cut interest rates impacts India’s economy, including foreign investment, the rupee’s value, and the Reserve Bank of India’s policies.