Fed Eyes 50 bps Rate Cut, China Ramps Up Stimulus, While India's Central Bank Eases Deposit Crunch Concerns
Birgul COTELLI, Ph. D.
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Global financial markets are bracing for another 50 basis point rate cut by the U.S. Federal Reserve Board in November, signaling continued efforts to manage economic headwinds.
Meanwhile, China is intensifying its stimulus measures to boost growth, opening the floodgates of fiscal and monetary support.
In India, the central bank chief is downplaying concerns over a potential deposit crunch, reassuring markets of stability despite challenges in the broader financial system.
Together, these developments highlight the varied approaches major economies are taking to navigate the current global economic landscape.
Fed Seen Cutting Rates Another 50 bps In November ...
... as Inflation Cools
The U.S. Federal Reserve Board is on track to deliver another 50 basis point rate cut in November, as cooling inflation strengthens the case for more aggressive monetary easing. Following a recent government report showing inflation slowing to a pace close to the Fed's 2% target, traders have increased their bets on another substantial rate reduction.
According to the Commerce Department, the Personal Consumption Expenditures (PCE) price index—the Fed's preferred inflation gauge—rose by 2.2% year-over-year in August, reinforcing expectations that the central bank may continue its rate-cutting trajectory. This figure aligns closely with Federal Reserve Chair Jerome Powell’s (wikipedia.org/wiki/Jerome_Powell) comments following half-point cut, during which he emphasized the importance of stabilizing inflation without undermining the labor market.
Cooling Inflation Supports Further Cuts
Powell and his fellow policymakers are expected to use the Fed’s upcoming meetings to reassess their approach, particularly as inflation trends downward. The sharp drop in inflation gives the Fed additional room to maneuver, as it seeks to support economic growth amid global uncertainty and domestic challenges.
“If the Fed wants to cut by another 50 basis points in November, the inflation data isn’t going to stand in their way,” noted Omair Sharif, president of Inflation Insights LLC . “In fact, the faster inflation cools, the more impetus there is for them to move faster to get to neutral.”
Market Sentiment and Rate Cut Expectations
Interest rate futures contracts now reflect a 54% probability of a 50 bps cut in November, compared to a 46% chance of a more modest 25 bps reduction. Traders are confident the Fed’s policy rate, which currently sits in the 4.75%-5.00% range, will fall by 75 basis points before the year ends, with further declines expected in 2025.
By mid-2025, market forecasts project the policy rate will hover between 3.00% and 3.25%, a level just above the neutral rate that Fed officials consider neither expansionary nor contractionary for the economy.
Balancing Inflation and Labor Market Strength
The Fed’s decision-making process is further complicated by the state of the U.S. labor market, which, although softening, remains robust. Powell has expressed confidence that the current economic conditions can accommodate rate cuts without triggering significant job losses.
In his September press conference, Powell acknowledged that the labor market, while still strong, has shown signs of cooling, but he emphasized the Fed’s commitment to ensuring sustainable growth.
“We’re at a point where we can make adjustments without putting too much strain on the labor market,” Powell said, suggesting that inflationary pressures are waning in line with expectations.
Looking Ahead
As inflation continues to fall, attention now turns to the Fed’s next moves. With the November meeting fast approaching, traders and analysts are preparing for further reductions in interest rates, aimed at maintaining economic stability and ensuring the Fed’s inflation target remains within reach.
If inflation continues to cool, and the labor market remains resilient, another significant rate cut could be on the horizon. Regardless, the Fed's careful balancing act between inflation control and economic growth will remain a key focus for markets in the months ahead.
Charting The Global Economy: China Opens Up Stimulus Flood Gates to ...
... Boost Economy Amid Global Challenges
China’s policymakers have unleashed a series of aggressive stimulus measures aimed at preventing the world’s second-largest economy from slipping into a deflationary spiral. The People's Bank of China (PBOC) led the charge by slashing interest rates on one-year loans and easing restrictions on second-home purchases. These moves, coupled with government-issued cash handouts and subsidies for unemployed graduates, represent a comprehensive effort to stabilize the economy in the face of mounting internal and external pressures.
The Chinese Politburo has also committed to increasing fiscal spending in an attempt to arrest the steep decline in property prices, which has been one of the most significant drivers of China’s current economic woes. The real estate market, once a cornerstone of Chinese growth, has faced a severe downturn that now threatens broader economic stability.
Stimulus Measures to the Rescue
The Chinese central bank initiated its most substantial rate cut on record by lowering the interest rate on one-year policy loans from 2.3% to 2%. This reduction, the largest since the PBOC began using the medium-term lending facility in 2016, is designed to revitalize market confidence and stimulate demand.
In addition to the rate cut, cash handouts were introduced for some jobless graduates, a demographic hit particularly hard by China’s economic slowdown. These direct payments aim to bolster consumer spending, which has been sluggish in recent months due to a combination of weak job growth and rising economic uncertainty.
Property Market Concerns
One of the most pressing challenges facing China's economy is the ongoing property market slump. Housing prices have continued to fall, and consumer confidence in real estate has waned. The government’s new policies include easing home-purchase restrictions and subsidies, particularly for second-home buyers, in hopes of reversing this trend.
Despite the sweeping nature of these measures, economists believe that this may be only the beginning of what is required to pull China out of its current economic slump. “This stimulus package is just a down payment,” said analysts. “If President Jinping Xi wants to steer China’s $18 trillion economy away from a prolonged downturn, more decisive and expansive actions will be necessary.”
Global Reactions and Market Impact
The global financial community is closely monitoring China's efforts. A positive initial reaction from the markets suggests that the central bank has bought some valuable time for the Chinese economy. However, many economists are cautious, emphasizing that further challenges remain, especially with weak consumer prices, slowing demand, and rising global trade tensions.
Meanwhile, international financial institutions are also under pressure. The U.S. Federal Reserve, for example, is contending with cooling inflation and sluggish household spending, as shown by the modest 2.1% rise in the core personal consumption expenditures price index in August.
A Broader Global Economic Picture
Elsewhere, the world’s other major economies are making their own moves. India, which has seen rising demand for gold following a cut to import taxes, is gearing up for strong festival and wedding seasons, which are likely to drive purchases of the precious metal. Mexico reduced borrowing costs for a second straight meeting as inflation slowed faster than expected. Similarly, Zambia is projected to see its fastest economic growth in over a decade as it recovers from a prolonged drought.
In Europe, inflation rates in France and Spain plunged below 2%, fueling speculation that the European Central Bank will expedite rate cuts. Swiss National Bank cut borrowing costs for a third consecutive meeting and signaled more reductions ahead, while Israel dealt with escalating geopolitical tensions as it carried out its heaviest airstrikes on different middle-eastern territories since 2006.
A Fragile Global Economy
China’s bold stimulus measures come at a critical time for the global economy, which is facing multiple headwinds. As inflation cools in major economies and global trade tensions persist, countries like China are employing all available tools to stimulate growth. Whether these efforts will be enough to stave off further economic decline remains to be seen, but China’s actions are likely to have significant ripple effects on global markets.
China's economic trajectory in the coming months will be crucial not only for its domestic prosperity but for the stability of the global economy. If the current measures fail to deliver a significant rebound, policymakers may need to deploy even more aggressive tools to ensure that China remains a key driver of global growth.
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India’s Central Bank Chief Plays Down Fears Of A Deposit Crunch
India’s banking sector is navigating through a challenging phase, as the gap between loan growth and deposit expansion continues to widen. Reserve Bank of India (RBI) Governor Shaktikanta Das (wikipedia.org/wiki/Shaktikanta_Das) has acknowledged concerns about the mismatch but assured that there is no immediate cause for alarm. In an exclusive interview with CNBC, Das addressed the issue of slowing deposit growth, which has underperformed in comparison to the rapid expansion of loans.
A Growing Gap Between Loans and Deposits
According to the latest data, annual loan growth stood at 13.6% in August 2024, while deposits grew at a slower pace of 10.8%. This 350 to 400 basis point gap is a key area of concern, as it could potentially lead to liquidity challenges for banks if not addressed. Das pointed out that while the current situation is not critical, the persistent underperformance of deposits relative to loans could strain banks’ ability to continue lending at the current pace.
“If it persists, then naturally the ability of the banks to continue their lending will get affected,” Das said.
Impact on Bank Profitability
One of the immediate concerns of this imbalance is its potential impact on net interest margins (NIMs), which measure the difference between the interest income generated by loans and the interest paid out on deposits. A reduction in NIMs can adversely affect the profitability of banks. If the gap between loan and deposit growth widens further, Indian banks may see their share prices take a hit, particularly given the substantial investments in the sector by global institutional investors.
Ashish Gupta, Chief Investment Officer at Axis Mutual Fund, echoed this sentiment, predicting that banking earnings in India are likely to be more muted this year compared to the last two. He also pointed out that the credit-deposit gap could weigh heavily on future profitability. “You will see earnings growth for the banks slow down,” Gupta said during an interview with CNBC’s Street Signs Asia.
Liquidity Concerns and Market Reactions
When lending outpaces deposits, liquidity can become an issue for banks, especially if they face difficulty in meeting withdrawal demands. However, Das reassured that the central bank is actively monitoring the situation for any signs of stress within the banking sector. He noted that loans may be circulating elsewhere in the financial system, potentially finding their way into higher-risk investments such as equity markets or debt funds.
“If people are going into the capital markets, it is their decision ... we have nothing to say on that,” he added, suggesting that the RBI is not overly concerned about shifts in how funds are being allocated.
Steps to Address the Gap
Despite the deposit growth lag, Das emphasized that Indian banks are actively working on increasing their deposit bases. Several banks are developing new products to mobilize more deposits, which could help alleviate some of the pressure caused by the current imbalance.
“I am happy to note that most of the banks are today really working on their drawing boards, and they are working on coming out with new products for deposit mobilization,” Das said.
Interest Rate Outlook and Economic Growth
India’s economic growth slowed to 6.7% in the second quarter of 2024, down from 8.2% the previous year. This deceleration has increased pressure on the central bank to reverse its recent interest rate hikes. Markets are currently pricing in a 95% chance of a rate cut at the RBI’s December meeting, though the October meeting remains less certain.
Das confirmed that the RBI will take inflation and growth dynamics into account when deciding whether to cut rates in October. “The growth momentum continues to be good, India’s growth story is intact, and so far as inflation outlook is concerned, we have to look at the month-on-month momentum,” he said.
Rate cuts could provide much-needed relief to the economy, but they may also have the unintended consequence of further compressing banks’ profit margins. Lower interest rates generally reduce the spread between what banks earn on loans and what they pay on deposits, adding to the challenges already posed by the current credit-deposit gap.
The Path Ahead
India’s banking sector remains resilient despite the challenges posed by the credit-deposit gap. The RBI’s proactive stance in monitoring liquidity and ensuring banks have the tools they need to boost deposits is crucial in maintaining stability. However, if the situation persists, banks may face profitability and liquidity challenges, which could have broader implications for the financial sector and the economy as a whole.
As India’s growth story continues to unfold, all eyes will be on how the central bank balances economic growth with financial stability in the months ahead. While the RBI Governor remains cautiously optimistic, the widening gap between loan growth and deposits is a risk factor that will need to be closely monitored. The central bank’s ability to manage liquidity while supporting growth will be essential in navigating this phase of India’s economic expansion.
Conclusion
From an economic standpoint, the varied responses by the U.S., China, and India to their unique financial challenges emphasize the complexities of managing global economic stability.
The U.S. Federal Reserve's anticipated rate cuts reflect a measured effort to control inflation while maintaining labor market health, signaling a careful balancing act. China’s aggressive stimulus, aimed at reviving growth through fiscal and monetary support, illustrates its urgent need to stabilize key sectors like real estate and consumer demand. Meanwhile, India’s central bank is addressing concerns over the growing credit-deposit gap with reassurances that the banking sector remains stable, though long-term risks of liquidity strains could emerge if the trend continues.
These different approaches show that while inflationary pressures are easing in some areas, the broader economic landscape is fraught with uncertainties, including liquidity risks and market volatility. For global markets, these policies highlight both opportunities and risks, as investors adjust to shifts in interest rates, fiscal spending, and growth trajectories.
Ultimately, how these economies navigate their respective challenges will play a pivotal role in shaping global financial conditions, influencing everything from trade and investment flows to inflation and employment trends worldwide.
Sources: Reuters.com Thehindubusinessline.com Cnbc.com
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