Washington/Jakarta.  The Federal Reserve is set to reduce its benchmark interest rate for the first time in over four years, with a decision expected Wednesday. Concurrently, Bank Indonesia forecasts three rate cuts by the Fed in 2024.

This comes as inflation has been largely contained, potentially lowering borrowing costs for consumers and businesses just weeks before the presidential election.

Uncertainty surrounds the size of the cut. Some economists and Wall Street traders predict a half-point reduction, while many analysts expect a more standard quarter-point cut. The move is seen as part of the Fed's effort to support a weakening job market while maintaining its inflation target.

Inflation has dropped from a high of 9.1 percent in June 2022 to 2.5 percent last month, just above the Fed’s 2 percent target. With inflation easing, the Fed is focusing on stabilizing the labor market and achieving a “soft landing,” aiming to curb inflation without triggering a recession.

Bank Indonesia Cuts Benchmark Interest Rate by 25 Basis Points to 6 Pct

This rate cut is expected to be the first of several, with additional reductions likely through 2025. These cuts are anticipated to lower borrowing costs for mortgages, auto loans, and credit cards, while encouraging business investment and stock market growth.

The job market, however, is showing signs of stress, with unemployment rising from its 2023 low of 3.4 percent to 4.2 percent. Fed Chair Jerome Powell has stressed that any further weakening in the labor market would be “unwelcome,” signaling that job growth remains a priority.

Meanwhile, Bank Indonesia (BI) predicts the Fed will lower its benchmark rate three times in 2024 as inflation nears the Fed’s medium-term target of 2 percent, amid slowing economic growth and rising unemployment.

BI Governor Perry Warjiyo indicated that these conditions have increased the likelihood of faster and larger cuts than originally anticipated. BI’s analysis projects three rate cuts in 2024, followed by four more in 2025.

“Our data suggest that the FFR may drop by 25 basis points in September, November, and December 2024. Four more reductions are likely next year,” Perry said on Wednesday.

The uncertainty surrounding monetary policy in advanced economies is fading as global inflation pressures ease. In line with US economic trends, the yield on 2-year US Treasuries has fallen below the 10-year yield, and the U.S. Dollar Index (DXY) has weakened. Similarly, the European Central Bank (ECB) has lowered its policy rate as inflation moves closer to its target.

“In Asia, the People’s Bank of China (PBoC) has also cut interest rates in response to low inflation and weak domestic demand,” Perry added.

He noted that these trends are reducing global financial market uncertainty and attracting increased foreign capital flows to emerging markets, including Indonesia. With clearer signals of rate cuts from major economies, particularly the US, further capital inflows are expected, boosting external stability for developing countries.

“These developments will support emerging markets in maintaining stability and promoting economic growth,” Perry concluded.

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