At the start of the year, the expectation was building that the US Federal Reserve would cut interest rates several times in 2024, as inflation cooled. How soon will the central bank cut rates though remains anyone's guess, given the recent inflation surprise prompting signals from several top executives at the Fed over the last several weeks that it's in no hurry to cut rates.
After the latest two-day Federal Open Market Committee meeting, the Fed on May 1 kept its interest rate unchanged at a 23-year-high of 5.25-5.50 per cent. This is the sixth consecutive meeting that rates have been kept on hold.
"In recent months, there has been a lack of further progress toward the committee's 2 per cent inflation objective...The committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 per cent," it said.
Later in a news conference, Fed chair Jerome Powell added that it would likely take longer for them to gain confidence that they were on a sustainable path down towards 2 per cent inflation.
Commentary from the Fed is keenly watched around the world and any cut from the Fed is likely to be followed by other major central banks.
The continued pause by the Federal Reserve is not surprising, given the inflation spike in recent months. The US Consumer Price Index (CPI) rose 3.5 per cent year-on-year in March, up from 3.2 per cent in February.
"The US Federal Reserve's decision to maintain benchmark interest rates unchanged underscores its cautious approach towards managing inflationary pressures. With concerns over the persistent lack of progress towards achieving the committee's 2 per cent inflation target, the Fed has chosen to exercise patience and vigilance," said Subho Moulik, CEO and founder of fintech company Appreciate.
Even as the Fed has been cautious over inflation, Powell has downplayed the possibility of further hikes, noted Madhavi Arora, lead economist at Emkay Global Financial Services.
Some experts believe that the Fed commentary was far more dovish than expected.
"Federal Reserve chair Jerome Powell discussed for the first time possible paths for interest rates this year. The upshot is that while any move at the next meeting is off the table, there is still a chance of a rate cut in July," said Deepak Jasani, head of retail research at HDFC Securities.
Others believe the Fed could delay rate cuts for longer if inflation persists.
"No Fed cuts in 2024, followed by shallow cut cycle is turning into a reality, as they struggle to get to the last mile of disinflation. This is already spilling over to EM central banks, including the RBI," felt Arora.
The Reserve Bank of India's monetary policy committee in April left its benchmark repo rate unchanged at 6.50 per cent for the seventh consecutive time. With India reporting strong GDP growth in recent quarters, and food inflation remaining a concern, there is an expectation that RBI too may not be in a hurry to cut rates and any rate reduction cycle may not be long.
Santanu Sengupta, chief India economist at Goldman Sachs expects the rate easing cycle is likely to be shallow with two rate cuts of 25 basis points each in consecutive quarters, most likely starting in the third quarter of calendar year 2024.
RBI's own forecasts on inflation have suggested that inflation will fall below its 4 per cent target in the September quarter, but pick up again in the December quarter.
So, economists at DMI Finance also believe "the room for substantial cuts will be limited" and that the next rate cut cycle could be much shallower than the past easing cycles, where 110-200 bps cuts were implemented.
Cuts by a major central bank will be a catalyst for others to follow suit. But, how inflation pans out over the next few months, will determine how central banks react and when the first rate cuts are initiated, and that may not be anytime soon.
