Preview: US Fed To Hold Rates On May 1, Rate Cut Likely In September, RBI To Follow Suit?

The US Federal Reserve is anticipated to cut interest rates in September this year as inflation remains stubbornly hot and the job market indicates strength in the employment sector in the world's largest economy.

Expectations of a June rate cut is now off the table and an increasing number of economists have pushed their policy easing calls to September or December this year. US core Personal Consumption Expenditures data shows that inflation rose 3.7% in the first quarter, after growing 2% in the fourth.

The core PCE index, which leaves out the cost of food and energy and is closely monitored by the US central bank increased 2.8% over the prior year in March, above consensus estimates for 2.7% and same as the annual increase seen in February. Fed's target mandate is 2 percent.

"Elevated inflation and strong activity and jobs numbers have pushed market expectations for the timing of the first interest rate cut to December," said James Knightley, chief international economist at ING.

"We still see an opportunity for a September rate cut. Nonetheless, the Federal Reserve will remain wary and signal that if inflation stays high, so will interest rates."

The Fed will announce its policy decision after its two-day monetary policy meeting on May 1, 2024. The central bank is widely expected to leave its benchmark overnight interest rate unchanged.

Fed funds rate - currently 5.25%-5.50% is now expected to remain steady at least until September and economists at Bank of America says policy needs more time to work.

"Recent inflation data has not given the Fed the confidence it desires to begin its easing cycle. While the Fed can dismiss some of the recent firmness as noise, it will take on board some signal and conclude disinflation is proceeding at a slower pace," BoFA economists wrote in a research note.

"We think a June rate cut is off the table and have shifted the first cut to December. We also lifted our terminal rate estimate to 3.50-3.75% in 2026."

RBI To Follow The Fed?

The Reserve Bank of India will likely follow the Fed and cut rates later this year. The RBI kept repo rate unchanged for a seventh straight policy meeting in April. Indian stock market too has been touching record highs despite high interest rates and at the heart of the Lok Sabha election.

Consumer Price Index in India decreased to 4.9% in March from 5.1% in February which indicates that rate cuts may come in the coming months.

Relatively lower inflation in Asia signifies the region's central banks can focus more on internal (domestic) conditions and less on what the Federal Reserve may do when setting monetary policy, the International Monetary Fund said on Tuesday.

"Expectations are that the Federal Reserve might continue holding rates at current levels with a possible rate cut only in the second half of the year before the US elections as Crude oil prices continue to stay rock solid, said AR Ramachandran of Tips2trades.

Ramachandran of Tips2trades added that the BSE Sensex could stay sideways to bullish with strong support at 71,800. Strong resistance will be at 75,125.