The US Federal Reserve has recalibrated its monetary policy, slashing the key interest rate by 0.25% for the third consecutive time. This comes after a two-day Federal Open Market Committee (FOMC) meeting on December 19, 2024, reducing the Fed’s target rate to between 4.25% and 4.5%. It marks the US Central Bank’s third consecutive policy cut in 2024 and the second straight 25-basis-point reduction.

While this move was widely anticipated, the Fed surprised markets by signalling a slower pace of rate cuts in the coming year. Under Chairman Jerome Powell, Fed officials are now expecting only two rate cuts for next year, down from the four they projected in September. They also foresee stronger economic growth, lower unemployment, and higher inflation in 2025 than earlier estimates.

This interest rate reduction, aimed at enhancing domestic economic growth, has sent ripples across international markets, including India. For the first time ever, the Indian rupee hit an all-time low, crossing the 85 mark against the US dollar on Thursday, highlighting the sensitivity of India’s currency to such global developments.

For India, this could mean dealing with potential capital outflows, rising import costs, and challenges in maintaining export competitiveness. Key sectors, such as IT and textiles, might face reduced demand as US businesses adjust to rising costs.

This announcement was the last scheduled rate decision before President Joe Biden hands over presidency to Donald Trump, who has proposed tariff increase and mass deportation of undocumented workers.

Powell expressed confidence that inflation would ease but said the Fed was starting to assess how President-elect Donald Trump’s policies regarding higher tariffs, tax cuts, and stricter immigration, might impact the economy. 

In India, on the other hand, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), opted to hold a steady repo rate at 6.50% after its scheduled meeting in early December, a move that acknowledges inflation risks but prioritises economic stability.

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