Will US Fed cut rates for the first time since the global financial crisis?

The Federal Open Market Committee (FOMC) of the US Federal Reserve will meet later this week (July 30-31) to take a call on policy interest rates. Financial markets are expecting the Fed to cut interest rates by 25 basis points. If it happens, this will be the first cut since the aftermath of the global financial crisis of 2008-2009, as Chart 1 shows. 

Here is a brief summary of various US macro-economic indicators, which are likely to influence the Fed’s decision. Firstly, 10-year government bonds are yielding less than short-term policy rates. Further, the US economy has been expanding slowly in the last few quarters than the preceding period, though it is still growing faster than the European Union (Chart 2). Consumer prices are also rising at a slower pace than the Fed’s target of 2 per cent (Chart 3). Then, Chart 4 shows that unemployment in the US has been reducing with the expansion in the economy, and joblessness is at the lowest level in more than a decade. With earnings growth, the US stock market has also moved up.

Earnings per share for the S&P 500 index is at the highest level ever, at $135 (Chart 5). However, many experts believe that stocks have been overvalued for a considerable period. For instance, the Shiller P/E ratio for the S&P 500 has gone above 30 (Chart 6). 

The exuberance is visible in the string consumption indicators in recent months (Chart 7) and the housing price index is rising in a stable manner (Chart 8). While slower US growth will affect global growth, policy accommodation would increase the fund flow to emerging markets like India.   




 

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines

Source: Bloomberg; Compiled by BS Research Bureau