The November policy of the US Federal Reserve, under the shadow of a new President-elect, did not contain any surprises. It moved the target range of federal funds rate lower by 25 basis points to 4.5 to 4.75 per cent and stated that it will continue to reduce the holding of securities at the current pace. The Bank of England too moved its key interest rate lower by 25 basis points last week.

While these measured rate cuts have been factored in by stakeholders, regime change in the US is likely to create volatility in financial markets. The disruptions could impact monetary policies of global central banks in the months ahead. The commentary accompanying the Fed policy indicated that growth and job market conditions were satisfactory while inflation needed to be kept under watch. GDP growth has been strong for the second and third quarters of 2024. Though the housing market has been showing signs of weakness, investment is picking up and consumption remains resilient. Tight job market conditions have eased with slower growth in nominal wages. Inflation, however, remains a nagging worry, with core personal consumption expenditure (PCE) inflation hovering around 2.7 per cent in August and September.

The Fed has options open to maintain the rates at current levels at least till the end of this year. Indeed, restrictive monetary policy seems to have shown better results in the UK and Europe. The CPI index has declined to 1.7 per cent in October in the UK and to 2 per cent in the Euro Zone. The European Central Bank has lowered its interest rate by 75 basis points since June. Though inflation remains above the desired rate in many emerging economies, including India, they will likely consider reducing rates to protect growth. Emerging economies such as Chile, Colombia, the Philippines and Thailand have reduced their policy rates in the third quarter of 2024. While the monetary policy normalisation is proceeding on expected lines, the change in regime in the US, following the Presidential elections is likely to pose currency related issues in particular for global central banks.

The US dollar index strengthened sharply last week as Donald Trump’s policies including large corporate tax cuts and imposition of additional tariffs on imports are expected to aid US companies, leading to a large inflow of investment funds into dollar denominated securities. This can exacerbate the outflow of foreign portfolio money out of emerging economies. The strong dollar has already made currencies of emerging markets lose ground; the rupee declined to its life-time low against the dollar on Monday. Additional uncertainty is being created by the existing friction between the current Chairman of the US Federal Reserve Jerome Powell and President-elect Donald Trump. While the Fed Chair was categorical in stating that the President of the US does not have permission under the law to fire or demote the Chairman, the Fed may find it hard to take independent decisions.