{"id":132703,"date":"2024-09-18T19:33:47","date_gmt":"2024-09-18T14:03:47","guid":{"rendered":"https:\/\/pwonlyias.com\/stage\/?post_type=current-affairs&#038;p=132703"},"modified":"2025-02-13T15:59:04","modified_gmt":"2025-02-13T10:29:04","slug":"us-fed-rate-cut","status":"publish","type":"current-affairs","link":"https:\/\/pwonlyias.com\/stage\/current-affairs\/us-fed-rate-cut","title":{"rendered":"US Fed Rate Cut"},"content":{"rendered":"<p><b>The USA Federal Reserve is all set for a rate cut soon<\/b><span style=\"font-weight: 400;\"> which is likely to have widespread impact on the global markets and particularly on India.<\/span><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">It will be the <strong>f<\/strong><\/span><b>irst rate cut by the US Federal Reserve since March 2020\u00a0<\/b><\/li>\n<li><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-132674 alignright\" src=\"https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2024\/09\/186-66ead69f26ee7.webp\" alt=\"US Fed Rate\" width=\"450\" height=\"237\" srcset=\"https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2024\/09\/186-66ead69f26ee7.webp 850w, https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2024\/09\/186-66ead69f26ee7-300x158.webp 300w, https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2024\/09\/186-66ead69f26ee7-768x405.webp 768w\" sizes=\"(max-width: 450px) 100vw, 450px\" \/><span style=\"font-weight: 400;\">The Fed <\/span><b>may go for a 25 basis point cut<\/b><span style=\"font-weight: 400;\"> in its key rate to the 5.00%-5.25% range, o<\/span><b>r a 50 basis point reduction <\/b><span style=\"font-weight: 400;\">to 4.75%-5.00%\u00a0<\/span>\n<ul>\n<li><b>Future Speculation:<\/b><span style=\"font-weight: 400;\"> The Rate cuts will continue well in future as the central bank is widely <\/span><b>expected to keep lowering rates to around 4.5% or even 4% <\/b><span style=\"font-weight: 400;\">by the end of the year, with more cuts in 2025.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Goal: T<\/b><span style=\"font-weight: 400;\">o achieve a<\/span><b> soft landing ie. a sustained high levels of inflation being brought down without setting off a recession.<\/b><\/li>\n<li><b>Factors Behind The US Fed\u2019s Rate Decision:<\/b>\n<ul>\n<li><b>Low Inflation: <\/b><span style=\"font-weight: 400;\">The inflation in the US has<\/span><b> dropped to 2.5% from a mid-2022 peak <\/b><span style=\"font-weight: 400;\">of over 9%.<\/span><\/li>\n<li><b>Cooling Labour Force Rates: <\/b><span style=\"font-weight: 400;\">\u00a0Hiring and wage growth have slowed, the number of job openings per worker has dropped and part-time work has risen as compared to full-time employment.<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">The<\/span><b> unemployment rate recently\u00a0 rose\u00a0 to 4.2%\u00a0<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>Shrinking Manufacturing Sector: <\/b><span style=\"font-weight: 400;\">The Rate cuts<\/span><b> will lower the borrowing rates driving investments in the economy also<\/b><span style=\"font-weight: 400;\"> resulting in more employment opportunities.<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">The U.S. manufacturing sector shrank for the 11th time in the past 12 months, indicating a decline in overall production and demand.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Inverted Yield-Curve: <\/b><span style=\"font-weight: 400;\">The yield curve<\/span><b> reflects the difference between the 10-year yield and the 2-year yield<\/b><span style=\"font-weight: 400;\"> is an indicator of a recession in the US.<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">The yield curve<\/span><b> has &#8216;un-inverted&#8217; sparking recession fears <\/b><span style=\"font-weight: 400;\">which has lead the Fed to implement more substantial and frequent rate cuts in the coming months<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p style=\"text-align: center;\"><span class=\"vc_button\"><a href=\"https:\/\/www.pw.live\/batches\/upsc\/pw-only-ias?utm_source=seo+upsc+batch&#038;utm_medium=seo+upsc&#038;utm_campaign=seo&#038;utm_id=upsc\" target=\"_blank\" rel=\"nofollow noopener\">Enroll now for UPSC Online Classes<\/a><\/span><\/p>\n<h2><span style=\"font-size: 18pt;\"><b>About US Federal Rate Changes<\/b><\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>The Federal Funds Rate is a primary Monetary Policy Tool in the hands of the US Federal Reserve <\/b><span style=\"font-weight: 400;\">through which it influences employment and inflation by controlling the availability and cost of credit in the economy.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Effects: <\/b><span style=\"font-weight: 400;\">Changes in the federal funds rate <\/span><b>influence other interest rates, which in turn influence borrowing costs for households and businesses, <\/b><span style=\"font-weight: 400;\">as well as broader financial conditions.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Authority:<\/b><span style=\"font-weight: 400;\"> The<\/span><b> Federal Open Markets Committee<\/b><span style=\"font-weight: 400;\"> sets the federal funds rate to guide overnight lending among U.S. banks<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-size: 18pt;\"><b>Impacts on India<\/b><\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Attract Investment:<\/b><span style=\"font-weight: 400;\"> With the Fed Rate cuts,\u00a0 the <\/span><b>difference between the interest rates of the US and the other country widens<\/b><span style=\"font-weight: 400;\"> thus making countries such as India more attractive for the currency carry trade.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">The lower the rate in the US, the higher the arbitrage opportunity<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>A Bulls Run in Stock Market:<\/b><span style=\"font-weight: 400;\"> A rate cut by the Fed typically leads to<\/span><b> increased foreign investment in emerging markets,<\/b><span style=\"font-weight: 400;\"> including India. As US treasury yields decrease, investors may seek higher returns in Indian equities,<\/span><b> potentially driving up stock prices<\/b>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Certain rate-sensitive sections, such as the<\/span><b> banking, realty, and automobile sectors, <\/b><span style=\"font-weight: 400;\">tend to benefit significantly due to the US Fed rate cut<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Currency Markets: <\/b><span style=\"font-weight: 400;\">The <\/span><b>Indian Rupee is likely to be strengthened <\/b><span style=\"font-weight: 400;\">making imports cheaper and exports costlier.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Gold Prices: <\/b><span style=\"font-weight: 400;\">Gold prices are expected to move upwards as lower interest rates will <\/span><b>\u00a0make the\u00a0 fixed-income investments, such as bonds less attractive<\/b><span style=\"font-weight: 400;\"> therefore increasing its demand.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Drives Global Growth:<\/b><span style=\"font-weight: 400;\"> Interest rate cuts <\/span><b>reduce the cost of borrowing in U.S. dollars,<\/b><span style=\"font-weight: 400;\"> thereby creating easier liquidity conditions for companies around the world<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Inflow of Funds into Emerging Markets: <\/b><span style=\"font-weight: 400;\">Lower U.S. interest rates should <\/span><b>also lower the yield available on U.S. assets such as Treasurys<\/b><span style=\"font-weight: 400;\">, thus investors will be tempted towards t<\/span><b>he emerging markets for better yields.<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Influence RBI Policy Rate Stance:\u00a0 <\/b><span style=\"font-weight: 400;\">RBI too like the other central banks<\/span><b> initiates a policy Rate change based on the cues offered by the US Fed.<\/b>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">The RBI last cut the repo rate by 40 basis points to 4% in May 2020 during Covid-19 pandemic just like the US Fed.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p style=\"text-align: center;\"><span class=\"vc_button\"><a href=\"https:\/\/store.pw.live\/govt-entrance-exams\/upsc-books\/upsc-textbooks?utm_source=SEO&#038;utm_medium=PW+Live&#038;utm_campaign=UPSC+Textbooks\" target=\"_blank\" rel=\"nofollow noopener\"><span style=\"font-weight: 400;\">Check Out UPSC NCERT Textbooks From PW Store<\/span><\/a><\/span><\/p>\n<table style=\"width: 100.094%;\">\n<tbody>\n<tr>\n<td style=\"width: 138.547%; 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