For four straight years, the United States Federal Reserve has not lowered the interest rate to curb inflation. Thus, it protracted the monetary easing cycle where the economy will have a better chance to grow and the consumption takes to increase due to that.
From the Indian perspective, this interest rate is known as the repo rate, which the RBI regulates. The main fundamental aspect of the Fed rate cuts is that it makes borrowing cheaper, and the banks can borrow money from the Central Bank at a cheaper interest rate, which then can be disbursed to businesses and people at a lower interest rate.
A person who took a floating-interest loan with the help of a loan agent can take its true benefit as the interest rate gets lowered and the individual can enjoy the lower interest rate on the same capital which they have taken.
Understanding the Rationale Behind Fed Rate Hikes and Cuts
One of the roles of the Federal Reserve or the central banks of any country is to watch the economy and understand what works best for the people of that nation. It’s like a lever that a bank has where it decides how much of the money flow will be there in the economy. During a time of recession or massive wealth gap then at that time rate cuts are important to bring back economic activities to life.
Fed increases the rate when it witnesses that there is enough money supply in the economy, and for that, one needs to deal with the time to time change of the interest rate of the central bank. When the Fed lowers the interest rate, it means it’s reducing the cost of borrowing, which gives a chance to the main street to promote debt-based purchases which increases consumption.
Why the US Fed Took the Decision to Cut
In the current situation of the US, the economy is not growing at an expected rate, and the rising unemployment is one of the chief reasons for the Fed to cut the interest rate. Now, the relationship between unemployment and the Fed rate cuts is a story of a domino effect.
When the interest rates get lowered, the businesses will go for capacity expansion, and that results in companies hiring back the workforce for the next leg of growth. Even consumption starts to pick up in the economy, which creates a virtuous cycle where businesses make a profit. In the street, people are also employed, thus reducing the employment rate.
Impact of Fed Rate Cuts on Borrowing Activities
One of the roles of rate cuts is that it makes borrowing an easy process. From the Indian perspective, the Fed rate cuts mean that RBI might also follow suit as it might make the cost of imports, and through that, it can make the goods and oil expensive.
A lower interest rate in the Fed is beneficial for businesses in India as the export markets start booming for those businesses due to the rising consumption in the US.
How Fed Rate Impacts the Indian Currency and Exports
The role of rate cuts impacts the currency as the dollar is hedged against all the major currencies. When the rate of interest gets cut, it makes the dollar stronger against the rupee and increases the cost of import from the overall market.
When it comes to the export of major services and products, the weakening of Indian rupees makes the exports expensive in the US market which loses the demand in that foreign market.
How Debt Repayment Gets Impacted With Rate Cuts
In debt repayment, the lowering of interest rate might work in favor of the businesses. When it comes to the role of debt financing, the businesses will not have the direct advantage of the interest rate cut. However, the banks start to lower the lending rates, which lowers the cost of borrowing for a business.
A business can take the help of the finance DSA app and, through that, contact an agent who can make the business loan possible at lower interest rates. It’s also beneficial for those businesses that have operations in the US or some manufacturing unit; in those cases, it can get the right interest rate and take the benefit of it.
These are some of the impacts of the Fed rate cuts and have a domino effect on the economies of the US and around the world.
