US Fed reduces rates as Trump's victory brings policy uncertainties
What's the story
The US Federal Reserve has announced a 25 basis points reduction in interest rates, the second such cut in 2024.
The decision comes less than two days after Donald Trump was re-elected as President.
Jerome Powell, Chair of the US Fed, said at a press conference that future rate adjustments would be based on economic data analysis.
Chair's stance
Powell affirms his position amid potential policy conflicts
Powell confirmed his intention to stay in office even if Trump asks him to step down, saying such a dismissal is "not permitted under law" by the White House.
This comes amid speculations of potential policy conflicts with the newly re-elected administration.
Analysts have raised concerns Trump's proposed tax cuts, tariff increases, and immigration control measures could potentially fuel inflation and increase government borrowing.
Uncertain impact
Powell addresses concerns over new administration's economic impact
Responding to concerns regarding the possible economic impact of the incoming administration's policies, Powell said it was too early for definitive predictions.
He stressed that the election results would not affect their policy decisions in the near term.
The US Federal Reserve has previously indicated plans for four rate cuts in 2025, but these will largely depend on economic data trends.
Rate implications
New federal funds rate and its implications
The new federal funds rate now lies between 4.5% and 4.75%.
The change is expected to benefit sectors like IT and pharma, although it's likely Indian markets have already factored in this development.
Despite being appointed by Trump in 2017, Powell has faced criticism from the President-elect who believes he has the right to comment on Fed actions.
Presidential impact
Trump's presidency and its potential impact on India
While Trump's presidency is viewed as good for American stocks and dollar, it could be bad for treasuries.
For India, this may make it difficult to sustain growth amid supply chain disruptions, trade wars, tariff barriers, and heightened forex volatility.
When the Fed cuts rates next could also determine the course of Indian monetary policy as uncertainties get resolved.
Rate predictions
Analysts predict potential end to US Fed's rate-cutting cycle
Analysts say Trump's promised tax cuts and tariff barriers could give an initial boost to the American economy but lead to higher inflation.
This could prompt the US Fed to end its rate-cutting cycle sooner than expected, affecting monetary easing strategies of other countries, including India.
The last time the Reserve Bank of India (RBI) cut the repo rate was by 40 bps to 4% in May 2020 due to COVID-19 pandemic-induced economic slowdown.