PREVIEW: It's Fed Week! US Central Bank To Cut Rates In June, RBI To Follow Fed's Footsteps

The US Federal Reserve will start cutting interest rates from June this year while the central bank is expected to keep a close watch on economic data including GDP, inflation and unemployment rate in the coming months, according to economists worldwide.

The Fed meeting on March 19-20 will be closely watched by the financial market. This comes right after the Bank of Japan ended 8 years of negative interest rates on Tuesday, representing a significant departure from one of the world's most aggressive monetary easing programs, which had long kept rates in the negative territory.

US inflation has fallen sharply and now hovering around 3% since peaking above 9% in June 2022. While inflation is still not below 2% - which is the Fed's target, the central bank expect prices to cool off further soon.

Fed Chair Jerome Powell in his current testimony to the Congress said policy easing would likely be "appropriate" at some point in 2024. But still-sticky inflation and a very resilient job market could prevent an early rate cut.

"While many at the Fed appear increasingly willing to consider the prospect of a future rate reduction, support for a change in policy is not unilateral and will be based entirely on further improvement in the inflation data," said Lidsey Piegza, chief economist at Stifel.

"At this point, back-to-back months of accelerating inflationary pressures offer no further evidence of a disinflationary trend with key metrics seemingly levelling off near 4%, more than double the Fed's 2% target. While the Fed hasn't entirely shelved the prospect of a near-term rate reduction, any further acceleration in inflationary pressures will not only keep the Fed sidelined for longer, but also perhaps reinvigorate the conversation for additional rate hikes."

The US central bank is expected to keep its fed funds rate, currently at 5.25-5.50, unchanged on Wednesday. Money market traders are also widely inline with economists' outlook for the Fed policy and are expecting a cut in June rather than May.

Economists are also expecting job market to cool and it will likely reflected in the coming months in the nonfarm payrolls data. That will also be fuelled by large corporations cutting jobs as AI takes over.

"The ISM employment components are in contraction territory, the National Federation of Independent Business suggests the weakest hiring by small businesses since May 2020 while the slowing quits rate - the proportion of workers quitting their job to move to a new employer each month - points to a less frenetic jobs market with diminishing wage pressures", said James Knightley, chief international economist at ING.

"The Fed doesn't want to cause a recession if it can avoid it and we believe they will be in a position to start moving monetary policy from a restrictive position to a more neutral stance before the summer."

While the US central bank is nearing its rate cut cycle, the Reserve Bank of India is expected to follow the Fed's footsteps and cut rates later this year.

"The last 2 inflation data points have been slightly higher than expected and various statements from the Fed officials suggest that they want to wait longer until they get assurance of direction of inflation towards 2%," said Mukesh Kochar, national head of wealth at AUM Capital.

"We expect Fed to start cutting rates by 2nd half of the year. However, incoming data on inflation and employment number will be the key to decide how early the rate cycle can reverse."