The US Federal Reserve recently decided to keep its key interest rates steady at a 23-year high. With inflation still above its target, the Fed has signalled caution and announced expectations of only one rate cut in 2024.
Here’s a look at the key points from this decision and its implications for global markets, including India.
The impact on Indian stock market
The US Fed’s decision to maintain high interest rates has a ripple effect on global markets, including India. Following the announcement, Indian markets saw a mixed response.
The Nifty closed at a record high, and the Sensex gained 150 points, although some investors indulged in profit booking at higher levels. The continued high interest rates in the US may result in more cautious investment strategies globally, potentially influencing Indian market trends.
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5 Key Takeaways from the US Fed’s Decision
1. US interest rates remain at 23-year high
Since July 2023, the Fed has kept its key overnight interest rate at a 23-year high, ranging from 5.25% to 5.50%. This is part of an aggressive monetary policy to combat inflation, which hit a 40-year peak. Despite inflation cooling to 3.3% in May 2024, the Fed remains cautious, waiting for sustained progress toward its 2% target.
2. One rate cut projected in 2024
The Fed’s updated projections indicate just one 0.25% rate cut in 2024, down from the three expected earlier. This conservative approach reflects the Fed’s focus on ensuring inflation is controlled before easing monetary policy. The new median year-end projection for the federal funds rate is 5.13%.
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3. Slower balance-sheet runoff
Starting June 1, the Fed will slow down how quickly it reduces its balance sheet, which means it will allow fewer Treasury bonds to expire each month—only $25 billion instead of $60 billion. This step is to avoid financial shortages and keep the economy stable while still reducing its holdings.
In short, the Fed is careful not to remove too much money from the economy too quickly, avoiding problems for banks and businesses while still working towards controlling inflation.
4. Economic projections and labour market
The Fed’s projections remain optimistic about economic growth, expecting a 2.1% GDP growth in 2024 and 2% in 2025. The unemployment rate is projected to stay at 4% by the end of this year, indicating a stable yet gradually cooling job market. This suggests confidence in the economy’s resilience despite high borrowing costs.
5. Market reactions and investor sentiment
Wall Street responded positively to the Fed’s decision, with the S&P 500 and Nasdaq Composite hitting record highs. Despite the Fed’s cautious stance, markets are betting on rate cuts later in the year, with expectations of cuts in November and December. However, the Fed’s firm tone on inflation control underscores the ongoing uncertainty in the economic outlook.
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Conclusion
The US Federal Reserve’s decision to hold interest rates steady at a 23-year high underscores its cautious approach to inflation management. While the move has led to mixed reactions in global markets, including India, the Fed’s commitment to data-driven policy adjustments remains clear.
Investors should stay informed about further developments, as the Fed’s actions will continue to influence global economic dynamics.
In summary, the Fed’s latest policy decision highlights a careful balancing act: maintaining high rates to curb inflation without derailing economic growth. As we move through 2024, all eyes will be on upcoming inflation data and the Fed’s subsequent actions, shaping the financial landscape for the foreseeable future.
