The US Federal Reserve held interest rates steady on Wednesday and signalled it is still leaning towards eventual reductions in borrowing costs, but put a red flag on recent disappointing inflation readings that could make those rate cuts a while in coming.
Indeed, US Fed chair Jerome Powell said that after starting 2024 with three months of faster-than-expected price increases, it “will take longer than previously expected” for policymakers to become comfortable that inflation will resume the decline towards 2 per cent that had cheered them through much of last year.
That steady progress has stalled for now, and while Powell said rate increases remained unlikely, he set the stage for a potentially extended hold of the benchmark policy rate in the 5.25 per cent — 5.50 per cent range that has been in place since July.
US central bankers still believe the current policy rate is putting enough pressure on economic activity to bring inflation under control, Powell said, and they would be content to wait as long as needed for that to become apparent — even if inflation is simply “moving sideways” in the meantime.
“Inflation is still too high,” Powell said in a press conference after the end of the Federal Open Market Committee’s two-day policy meeting. “Further progress in bringing it down is not assured and the path forward is uncertain.”
All eyes on RBI
The decision of the US Federal Reserve to put interest rates on hold for the sixth consecutive time has led analysts
to question the RBI’s position — whether it would take
the lead over the US central bank in ushering in a rate cut cycle.
Economists remain divided with some of the views RBI governor Shaktikanta Das and the five other members of the monetary policy committee (MPC) may start to cut rates towards the latter part of this calendar year.
Others say the first reduction will come only in January-March 2025.
Last month, the MPC retained the policy repo rate at 6.50 per cent for the seventh consecutive time.
Das has maintained the RBI does not follow the Fed’s path on interest rates and a decision will be based on domestic factors.
The economic department of SBI said it “expects a series of rate cuts beginning October 2024, followed by another in December 2024 and possibly in February 2025. The stance change (to neutral) can happen in October itself.”
The economists at HDFC Bank pointed out the RBI is likely to cut rates in the second half of 2024-25, although it would be a shallow rate-cut cycle.
Brokerage Elara Capital said the current repo rate of 6.50 per cent will persist till the end of calendar year 2024. It expects a reduction only in the fourth quarter of the current fiscal year.
