Fed set to cut rates next week as markets anticipate policy shift: Willem Buiter

Global markets continue to ride the momentum of easing inflation data and expectations of a Federal Reserve policy shift. US CPI numbers came broadly in line with estimates, while the 10-year Treasury yield slipped below 4%, triggering a stellar rally on Wall Street. Investors are now turning their attention to the upcoming Fed meeting.

Speaking to ET Now, economist Willem Buiter said there was little ambiguity about the Fed’s next move. “There can be little doubt that the Fed will cut rates by 25 basis points on the 16th-17th of September and they will probably hint at one or two more cuts to come during the rest of this year,” he noted.

Buiter pointed out that while the annual CPI print at 2.9% was within expectations, the monthly inflation rate of 0.4% implied a 5% annualized pace — still above the Fed’s comfort zone. However, he added that the central bank is now prioritizing weak employment data over inflation risks. “I expect two or three more cuts this year starting with 25 basis points this September,” he said.

Impact on the Dollar

The looming rate cut has raised questions over the dollar’s trajectory. Typically, looser monetary policy weakens a currency, but Buiter argued the picture is more nuanced. “So many factors drive the demand for the dollar which is still the world’s leading reserve. If markets get bullish on US assets, the dollar could rise along with other asset prices,” he said, describing the behaviour as “myopic but the norm.”

Emerging markets outlook

On emerging markets, Buiter highlighted divergent performances across regions. “India is growing at a spectacular rate. The latest annualised estimate is 7.8%. China is not doing particularly well and may come in below 5% growth this year,” he observed.

Latin America, meanwhile, faces challenges. Brazil is being hit by steep tariffs. “Brazil is getting hit hard by the 50% US tariff which Trump imposed on them, the way he did on India,” Buiter noted.

Despite such headwinds, he remained optimistic about the broader outlook. “Other emerging markets on the whole will benefit from policy actions like the wage cut you are going to see in the US that boosts demand,” he explained, while stressing that domestic factors will ultimately be more decisive.

“On the whole, I expect that key emerging markets — India, China, Indonesia — could be doing pretty good for the next year or so,” Buiter concluded.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)