Why US Fed is not likely to cut rates anytime soon? All you need to know

US Fed Rate Cut: “When America sneezes, the world catches a cold" a saying we all have been brought up with and cut to 2024, this is being reflected in the case of the US Fed delaying the rate cut and its ripple effect across the world.  A few days back, US Fed Chair Jerome Powell signalled that the Fed is unlikely to cut interest rates anytime soon as expected and anticipated by the Street. 

Powell’s comment about the delayed rate cut made sense as US inflation in March came in at 3.5 per cent more than expected, as the US Fed target is to bring down inflation around 2 per cent. Since the inflation print has plateaued over and above the desired inflation target, the hope of rate cuts has been dashed by the US Fed chair himself. 

Powell's comment that the policymakers would wait longer than previously anticipated to cut rates not only impacted the US markets but also had a ripple effect across all global markets. 

But the key question is why does the US Fed decision matter to the world?

The US Federal Reserve's decisions hold immense significance not just for the US economy but for the global economy as a whole. The Fed's actions, particularly regarding interest rates, are closely monitored by policymakers, investors, and businesses worldwide due to their far-reaching implications.

As the world's largest economy, the US plays a central role in shaping global economic trends. Any missteps by the Fed can have ripple effects across international markets, leading to volatility in currencies, investment flows, and asset prices. Moreover, the US dollar serves as the primary reserve currency and a benchmark for economic performance, making its movements highly influential.

For developed economies, a strong US Dollar may signify confidence in the US economy and global stability. However, for emerging markets, it can pose challenges such as currency depreciation, capital outflows, and debt burdens. Therefore, the Fed's policy decisions must strike a delicate balance to support domestic growth while minimising adverse effects on the global economy.

But the US Fed's “ Higher for Longer” which means higher interest rates for a longer time just to tame the red-hot inflation has also impacted the market. But how? According to the Asian Development Bank, a ‘higher for longer’ interest rate scenario, under which the U.S. Federal Reserve and the European Central Bank defer anticipated rate cuts to beyond 2024, would impact emerging economies’ currencies as well as growth and inflation outlooks, with India likely to see the most pronounced effects among Asian countries. 

Impact on India's Economy

The higher interest rates encourage investors to invest capital in the US seeking higher returns on bonds and interest-rate products. This strengthens the dollar. And when the interest rates are lowered, there is more availability of dollars and strengthening of the rupee, which would mean a lower import bill for India.

The strengthening of the rupee is a big relief for India as the nation imports around 80 per cent of its total oil consumption from various countries across the world. 

Simply speaking, a strengthened rupee reduces India’s import bill and a strong dollar increases the import bill which in turn increases the fiscal deficit and current account deficit, which in turn puts pressure on the Indian rupee and leads to depreciation. And depreciating rupee is not good for the health of the economy as this leads to capital outflow and capital flight from emerging economies like India.