Expectation of steady, sustained global rate cuts as Fed kicks off easing cycle

On September 18, the US central bank – Federal Reserve (Fed) made a decisive move to kick off its easing cycle with a significant rate cut, aimed at preventing further deterioration in the country’s labour market.
The Fed lowered its policy rate by 50 basis points (0.5%), bringing it to a range of 4.75% to 5%, making borrowing cheaper for millions of Americans and paving the way for rate cuts around the world.
While bold, the rate cut keeps short-term rates relatively elevated, offering the central bank and investors some breathing room to adjust for what lies ahead.
The Federal Reserve cut its benchmark interest rate from its 23-year high, with consequences for debt, savings, auto loans, mortgages and other forms of borrowing by consumers and businesses, according to Associated Press.
The central bank is acting because, after imposing 11 rate hikes dating back to March 2022, it feels confident that inflation is finally mild enough that it can begin to ease the cost of borrowing.
At the same time, the Fed has grown more concerned about the health of the job market. Lower rates would help support the pace of hiring and keep unemployment down.
“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the Fed said in a statement.
“Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress.”
“We believe the economy is heading for a soft landing,” said Erik Aarts, senior fixed-income strategist at Touchstone Investments.
However, the rates market is still uncertain about the trajectory of future moves, he told MarketWatch.
Rate cuts are typically considered a boon for stocks, as money gets pulled away from lower-yielding government bonds and money market funds, leaving investors searching for more enticing returns. The US benchmark S&P 500 stock index has gained 86% of the time in the 12 months after the first rate cut in a cycle dating back to 1929, Forbes said in a dispatch.
The Federal Reserve’s first rate cut – a bumper 50bps reduction – raises the question of what a more frontloaded loosening in the US means for other economies.
Oxford Economics believes it may give policymakers in emerging markets more scope to loosen, but it is sceptical that the Fed’s decision will prompt more aggressive rate cuts by central banks in other major economies.
A few factors supported the case for the Fed starting its pivot with a 50bps reduction rather than the 25bps cuts implemented by its central bank peers. US policy rates are higher than in other advanced economies and it is pivoting later.
The Fed’s dual inflation and unemployment mandate also means that it has a duty to put more weight on the labour market than policymakers elsewhere. It also needs to worry less about the exchange rate implications of its actions.
The 50bps cut sends a strong signal that central banks are shifting back towards business as normal, and that their focus is becoming more forward looking and less focused on the latest inflation numbers.
This, Oxford Economics, said supports its expectation of steady and sustained rate cuts from here.