With the U.S. Federal Reserve Board beginning to cut interest rates, the rest of the world’s central banks are primed to synchronize monetary policy, says Moody’s Ratings.
In a new report, the rating agency said the Fed’s decision to cut rates by 50 basis points last week saw it join the growing ranks of central banks in easing monetary conditions.
Alongside the Fed, the central banks for South Africa and Indonesia both began easing rates last week.
While the Bank of England kept rates unchanged, Moody’s noted it already began cutting rates in August, and it expects that easing to resume in November.
The shift in Fed policy “will enhance other central banks’ ability to calibrate their policy stance in line with domestic economic conditions,” the report said. As a result, Moody’s expects a period of increasingly synchronized policy normalization.
The Fed’s move to begin lowering rates reflected its evolving outlook for the economy, inflation and employment, it noted.
“The decision to hold rates in May and then July, despite significant disinflation, moderating growth momentum and a softening labour market, made its monetary policy stance tighter than optimal,” Moody’s said.
Since then, the “Fed’s assessment of the balance of risks has shifted,” it noted. Specifically, there’s now more concern about the downside risks to growth and the labour market, and reduced concern about inflation.
“With inflation within spitting distance of the Fed’s target, its attention has shifted to safeguarding the maximum employment objective of its dual mandate,” Moody’s said.
Looking ahead, Moody’s said it expects the Fed to lower rates by another 150 basis points by the end of 2025.
“However, if labour market conditions take time to stabilize, the Fed will likely move to a neutral policy stance early, with front-loaded rate cuts,” it said.