US Federal Reserves’ jumbo cut is having global impact on stock markets

By Anjan Roy

September 19 is a big day for financial markets worldwide. The US Federal Reserve has at long last acted how the markets expected it to act. It cut interest rates. This is having global impact and already the stock markets are adjusting, as we have seen in the sharp climb of the Indian market. This is the first rate cut from the US central bank since March 2020.

What is more noticeable is that the US Fed has exceeded all expectations and delivered a far deeper cut than anyway could foretell — as some commentators put it a “jumbo half a percentage point” cut. Thus, the markets have been taken by surprise on the upside. Some of the commentators are describe such a big as “front loading” of monetary policy making.

In doing so, the Federal Reserve chairman, Jerome Powell, said that the US economy was in robust health and continuing to grow. At the same time, despite keeping the interest rates at historic high, the economy has continued to grow and did not fall into a recession.

At the same time, the raging prices have calmed down and the price inflation was within almost the target level. He felt that the battle over taming inflation has been won and therefore he had gone for a half a percentage point cut in its policy interest rate, even though one of its twelve governors differed from this perception and advocated a lower quarter of a percentage paring.

This would for sure have implications globally. The central banks of major countries are likely to reset their interest rates in response to the Federal Reserve move. One can expect a run of rate cuts all around.

The US Federal reserve decision would influence global flow of money. It is reasonable to expect that to take advantage of the emerging markets economies, the fund managers would place some additional investments in these markets. The Indian stock market is one of the targets for major institutional investors and India weightage in one of the most prominent global stock indices has climbed marginally over even the Chinese.

The Indian stock market is already witnessing an early flutter. The stocks have gained in today's trading, despite being in high levels already. In a situation of rate adjustments the comparable values of stocks and bonds realign. One can safely expect the one prices to fall while stocks rise. The portfolios would be reset.

The late scale movements of additional funds could at the next stage ruffle the foreign exchange market are well. One can expect that the easier rates for the Indian rupee vis a vis the US dollar could reverse and show adjustments in accordance with the flows from the foreign institutional investors. Why then, the United States central bank has taken such a major step at this point of time. Opinions differ. Interpretation of data varies.

Fed chairman Powell has pointed to the reverse situation in the US economy. While earlier in the year, the prices were rising by 4.2% and unemployment rate was at 2%, currently the situation is the exact reverse. Prices are rising by 2% and unemployment up at 4.2%.

Powell pointed out that before unemployment rises further, the central bank had to make a move towards giving support to the overall economic activity to stop unemployment from rising any further. In fact, there are those among economists and market operators, the Fed might already be behind the curve, that is, it has delayed the rate cut for too long.

The central bank had maintained its policy rates at historically high level — to be precise at a 23-year high. As a consequence, the markets as well as the economists ere expecting the Fed to cut policy rates at its meeting in January this year, but it did not happen. Then in March meeting of the monetary policy committee a cut was expected but did not materialise. Again, in June there was a similar expectation. Now, only in September there comes a cut.

All through, the economists were fearing that continued high interest rates would give the US economy into a recession. That was the fear for a long time. The Economist magazine had expressed its amazement that the US economy was still growing, though the interest rate was being hiked successively since first quarter of 2020, as “gravity defying”.

In fact, the behaviour of the US economy has been perplexing. Following conventional economic logic, central banks raise interest rates when prices are rising. A high interest rate chokes demand, curtails investments, thereby triggering the employment loss. Thus, there is a trade off between employment and price rise.

But this time, the Fed raised its interest rates when US prices were at a historic high pace. All expected rise in unemployment and in fact a recession. Neither happened and the US merrily went growing. At the same time, since recently, blazing price rise slackened and fell to the acceptable band of the central bank.

Possibly, this is the beginning of new economics. Economists are struggling with the data and the behaviour of US consumers to find clue. It might lie in the pandemic and its wake. The large pool of unspent money in the hands of the consumers played the trick in keeping the economy floating. It might be too risky to accept the phenomenon as routine.

(IPA Service)