Washington: The US Federal Reserve stayed on track for three interest rate cuts this year as chairman Jerome Powell on Wednesday affirmed that solid economic growth will continue despite signs that inflation remained elevated at the start of 2024. The Federal Reserve also left interest rates unchanged and released new quarterly economic projections that showed officials expecting the economy 2.1 per cent this year.
The projections are above the US economy's long-run potential and a substantial upgrade from the 1.4 per cent growth seen as of December. Meanwhile, the unemployment rate is only expected to hit 4 per cent by the end of 2024, barely changed from the current 3.9 per cent level, while a key measure of inflation is projected to keep falling, though at a somewhat slower pace, to end the year at 2.6 per cent.
The projections were released after a two-day policy meeting at which officials left the benchmark overnight interest rate in the 5.25 per cent-5.50 per cent range and held onto their outlook for three cuts in borrowing costs this year. The projections showed that the Fed still foresees a so-called "soft landing" from the post-pandemic spike of inflation to a 40-year high.
Fed expects 'elevated' inflation to cool
Powell said the timing of those reductions in interest rates still depends on officials becoming more secure that inflation will continue to decline towards the Fed's 2 per cent target even as the economy continues to outperform expectations. Inflation reports at the beginning of the year showed price pressures remained "elevated," but "haven't really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road to 2 per cent," Powell said in a press conference.
If the inflation levels don't decrease, Powell said the Fed would maintain high-interest rates as long as needed. Asked explicitly about recent comments to Congress that the Fed was "not far" from gaining the confidence it needs to cut rates, he sidestepped repeating those words and instead said his "main message" was that the US central bank still needed more data to change policy.
"It's appropriate for us to be careful," the Fed chief said, reiterating a go-slow approach to rate cuts that has been buttressed by the economy's ongoing strength, with officials saying they are in no rush to ease monetary policy while the economy and the job market continue to grow. The economic outlook is likely to be welcomed by the Biden administration with its outlook for continued growtrh and low unemployment.
While officials affirmed their view for three rate cuts this year even as they upgraded the economic outlook, they trimmed the number of cuts expected next year from four to three for a slightly shallower pace of easing - a stance one analyst characterized as "bullish-dovish."
Rate cuts would, over time, lead to lower costs for home and auto loans, credit card borrowing and business loans and are likely to help in US President Joe Biden's re-election bid, which is facing widespread public unhappiness over higher prices and could benefit from an economic jolt stemming from lower borrowing rates.
How it impacted India's stock market?
The indications of three rate cuts are positive for India's stock market, which has been eagerly anticipating a rate cut for nearly a year. The rate cut projections had a major boost to stock markets around the globe, as banking and IT stocks gained sharply. Additionally, the rupee rebounded 14 paise to 83.05 against the US currency in early trade on Thursday as the dollar retreated from high levels in global markets after the US Federal Reserve indicated three rate cuts this year.
Indian shares joined a global equity rally on Thursday after the US Federal Reserve maintained its projection of three rate cuts this year, with metals leading the charge on the back of a softer US dollar. The NSE Nifty 50 index gained 223.50 points to 22,062.60 while the BSE Sensex added a major 711.96 points to 72,813.65 at 10:10 am.
"Markets were not expecting this kind of clarity on rate cuts from the US Fed, and that has driven the rally," said Avinash Gorakshakar, head of research at Profitmart Securities. Tata Steel, JSW Steel, IndusInd Bank, Power Grid, Wipro, and NTPC were the biggest gainers, while Maruti and Nestle lagged behind.
In Asian markets, Seoul, Tokyo, and Hong Kong were trading significantly higher while Shanghai quoted lower. Wall Street ended with remarkable gains on Wednesday. "The response from the market was the US indices racing to record highs. This favourable global construct will have its positive impact on Indian markets too," said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
Metals jumped 2.1 per cent, rebounding from a 1.7 per cent drop in the last two sessions, helped by improved risk appetite and a weaker US dollar after the Fed said it remained on track for three interest rate cuts this year. A weaker dollar makes metals cheaper for holders of other currencies. It will be unlikely for the rally to continue in broader markets beyond a session or two because the concerns over elevated valuations remain, Gorakshakar added.
(with inputs from Reuters, PTI)
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