Clipped from: https://www.thehindubusinessline.com/opinion/editorial/tricky-times/article70226099.ece
U.S. Federal Reserve Chair Jerome Powell holds a press conference after the Fed cut interest rates by quarter of a percentage point, in Washington, D.C., U.S | Photo Credit: KEVIN LAMARQUE
In an eventful Wednesday, the US Federal Reserve cut its effective funds rate by 25 basis points to 3.75-4 per cent, the second such rate cut this calendar year. But what took the markets by surprise was Fed Chair Jerome Powell’s remark that a rate cut in December was by no means a “foregone conclusion”. Amidst overt pressure from US President Donald Trump, a steady stream of rate cuts had perhaps been taken for granted. Powell trotted out his reasons for the December guidance — inflation being above the comfort level and the absence of government data to go by, in the event of the “shutdown” — but the effect was perhaps just what he wanted: US 10-year treasuries firmed up after the policy, despite the rate cut, to ward off inflationary expectations.
Powell presented a gloomy view on the labour market and consumer demand scene in the US, on the whole triggering a ‘risk-off’ sentiment across markets. Gold and the dollar gained, while equities, bonds and the rupee among other currencies lost. In India, the yield on the benchmark 10- year note nearly touched 6.6 per cent on Thursday, before tapering off on Reserve Bank intervention. For India, however, there is no case for alarm. The Monetary Policy Committee can be expected to remain focused on domestic growth and inflation dynamics, despite the tremors emanating from the Fed. There is no reason as of now to conclude that any further narrowing of the yield differential between US and India will inevitably lead to skittish capital flows, as the Indian economy looks robust. A trade deal with the US could ease up the tightness in financial markets and end the prevailing risk-off behaviour.
However, the unmistakable sense of fragility in the world’s largest economy is surely a cause for concern. Powell’s reference to elevated inflation in the wake of tariffs did not come as a surprise, but his take on growth and demand certainly did. The data says a lot: US growth was 1.6 per cent in the first half of 2025 (2.4 per cent last year) and consumer inflation at 2.8 per cent up till September. This is a ‘dual risk’, or stagflationary situation. The labour market, he said, was cool despite immigration impacting supply. It perhaps reflects the Fed’s ambivalence that it is likely to wind up its ‘quantitative tightening’ efforts by December, and keep its balance sheet size at $6.6 trillion for a while — an indication that liquidity absorption cannot help an economy that is sputtering. His candid observations about K-shaped spending — of lower end consumers not doing as well as the premium ones — could translate into lower corporate earnings and IT budgets.
If the US slows down, it will likely take the rest of the world with it, tariffs or no tariffs. India should focus on internal growth drivers. Meanwhile, in a climate of geo-political and other risks, it is quite normal to expect US yields to remain elevated, despite Fed rate cuts — as has indeed been the experience in recent times.
Published on October 31, 2025
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