Fed’s bold move reshapes policy horizon for counterparts around the world | World News

Powell and his colleagues faced some risk of spooking the public into perceiving that recession risks were rising by cutting more than most economists anticipated. Instead, he offered reassurance, saying the Fed’s patience in not moving until now had paid “dividends” by boosting confidence inflation — which had surged to the highest since the 1980s — has been tamed.

Wednesday’s move was “a sign of our commitment not to get behind” the curve, he said. Investors initially reacted with confidence, though US stocks closed with modest declines. 

“The half-point cut by the Fed will ripple through other central banks’ interest-rate decisions and lead market participants to conclude that the US economy is slowing, perhaps leading to a global slowdown,” said Stefan Gerlach, chief economist at EFG Bank in Zurich and a former deputy governor of the central bank of Ireland. 

Policymakers led by President Christine Lagarde are going out of their way to stress they decide on policy independently. In the run-up to the ECB’s first rate cut in June — when the US economy was still running hot — Lagarde insisted that the move would be inspired by data, not the Fed.  

But they’ve also acknowledged that US monetary policy has significant repercussions for the 20-nation bloc. They haven’t ruled out lowering borrowing costs in October, even if such a move is unlikely, people familiar with the matter said last week.

Acting that month and again in December would put the ECB and Fed eye-to-eye on the overall size of rate cuts this year. US officials expect borrowing costs to be 100 basis points lower by the end of the year than they were before Wednesday’s half-point move. 

A recent study by the Institute of International Finance showed rate changes in the US have been the most important driver of decisions in Europe since 2021. 

“Even if the ECB makes decisions independently from the Fed, interest-rate differentials with respect to the Fed may have real economic effects in the euro area and, thus, should be taken into account,” said Marcello Estevao, the IIF’s chief economist. Otherwise, they’d risk an appreciation of the euro, declining exports, a weaker economy and a disinflationary shock.

Global Roundup

 

Emerging-market central banks in countries including those in the Persian Gulf that peg their currencies to the dollar followed suit and also lowered rates by half a point. The Hong Kong Monetary Authority also cut its base rate in line with the Fed’s move. 

Thursday will probably see the Bank of England keeping policy unchanged, while the South African Reserve Bank is expected to lower its rate by a quarter point.

The likely reaction in emerging markets with free-floating currencies isn’t so obvious. While they, too, have often followed the Fed in the past, the US central bank has proved less of an anchor in the current cycle, according to Bloomberg Economics. 

Officials in Jakarta raced ahead with a quarter-point cut on Wednesday, and lower rates in the US frees up space for rate setters from Seoul to Mumbai to move too, though other considerations like financial stability are in play.  

In Japan, where central bankers are just getting started with tightening policy, the Fed’s move may have implications on what’s to come. 

The Bank of Japan is widely expected to keep interest rates unchanged on Friday. Updated forecasts in October may shine the light on hotter wage and price trends and tempt them to hike by a quarter-point, says Taro Kimura, BE’s senior Japan economist.

That’s unless the Fed’s decision is taken as a warning shot that more serious trouble is ahead for the global economy.

First Published: Sep 19 2024 | 7:38 AM IST