Monetary Policy Changes

This time Is different We don't often say that about the Fed, but after yesterday's FOMC meeting, we think it may actually be true. In fact, we believe yesterday's meeting ushered in a new era of monetary policy in the United States.    For the better part of two decades, monetary policy has followed a familiar playbook: extensive forward guidance, frequent communication, data dependence and the  Federal Funds rate as the primary policy tool. While leadership has changed, the broader framework has remained remarkably consistent.   What we heard yesterday suggests the possibility of a meaningful evolution.   We believe the Fed may be moving toward a framework that places less emphasis on signaling every move in advance and more emphasis on assessing where inflation, employment and broader economic conditions are heading. In a world of real-time data and increasingly sophisticated analytics, that could prove to be a healthier and more effective approach.   We also continue to hear indications that the policy toolkit could broaden beyond the overnight policy rate, with greater consideration of balance sheet policy, liquidity conditions, money supply dynamics and longer-term interest rates.   Importantly, change does not automatically mean more volatility. A broader set of tools and a more forward-looking approach could ultimately increase confidence in policy outcomes rather than diminish it.   For investors, the near-term message remains straightforward: inflation is still above target and remains the Fed's primary focus. While rate hikes are far from certain, they remain a possibility that markets need to respect.   That's one reason we continue to favor income-oriented fixed income opportunities over pure interest-rate expressions. And when markets overreact to uncertainty around policy change, we think there may be opportunities to sell volatility rather than buy it.   This time may indeed be different, and it will be fascinating to watch how this evolution in monetary policy unfolds. The real question is whether less signaling creates more uncertainty, or ultimately more confidence in the Fed's ability to achieve its objectives.

The Fed has taken a significant step by officially initiating its cutting cycle, which holds profound implications for the financial world. ⚠️The #FOMC has cut the FFR by 50 Basis Points to a 4.75%-5% Range. ⚠️The latest projection of the Neutral Rate, R*, came in at 2.8% versus the previous estimation of 2.9% A cutting cycle might affect other central banks' stance on monetary policy because the US Dollar could devalue considerably going into 2025, making exports from other countries like Japan more expensive. For the past two weeks, business media has made a huge story out of a 25—or 50-basis point cut, but in my opinion, today's decision on the magnitude of the cut is meaningless. Financial conditions have eased considerably since July, so it should not be a surprise that the US economy might have already started to re-accelerate. The Atlanta Fed GDPNow is flashing a Real Growth Rate of 3% for the US Economy. If that materializes, it would mean that the US #Economy is already running 1% above its potential. Why financial conditions have already started to ease? Here are some examples: ✍️Mortgage Rates decreased from 7% in July to 6.15% today ✍️The 2-Year Yield decreased from 4.75% in July to 3.63% today ✍️The 5-Year Yield decreased from 4.06% in July to 3.47% today ✍️Housing Starts have picked up momentum What market participants have priced out is a resurgence of inflation during 2025. That scenario is entirely possible if the Dollar Index drops below 100. A cheaper dollar will make commodities and import prices more expensive for the US consumer, and a reduction in real income could squeeze even more of the low to middle class into the USA. Considering the decrease in US Treasuries for the past two months, I find US Government Bonds expensive across the yield curve at these levels. I think R* is well above what the Fed estimates because of factors like de-globalization, the reshoring of strategic industries, and increased protectionism. The terminal rate post-pandemic is between 3.5% and 4%, in my opinion, and that is where I think this cutting cycle will end. If I am proven right, bond investors must reprice government bond yields higher. How do we play a potential increase in inflation in a no-landing scenario? I tilted my portfolio as I outline here below: 👉Tilt the portfolio to over-weight energy and miners. 👉Have a marginal exposure to Gold and Silver. 👉Favor TIPs over US Treasuries 👉Increase allocation to US Value Stocks and International Stocks. 👉Lock-In US Investment Grade Credit at the belly of the yield curve where we can still get 4.8% to 5% yields, especially on issues at the Single-A Rating Enjoy the ride! #Finance #InterestRates #Economy #Investing

What's the bond market signalling here? Bond markets are often referred to as ''smarter'' than equity markets in predicting what's next for the economy. Yet the reality is a bit more nuanced. Today, bond markets are pricing the Fed to proceed with ~175 bps of cuts in the next 12 months hence bringing Fed Funds from 5.25% to 3.50%. How does one interpret this? The typical superficial analysis involves looking at these cuts in a simplistic fashion: 175 bps in a year is a robust cutting cycle, so that must mean inflation has collapsed or even a mild recession has hit the US economy. But what if we think in scenarios? 1) Recession 2) Soft Landing 3) Sticky inflation / Structural ''Higher for Longer'' A more useful way to think about the ~175 bps number is to think of it as the weighted average of scenarios probabilities and Fed actions in each scenario. 1) Recession: 350-400 bps of cuts 2) Soft Landing: 100-200 bps of cuts 3) Sticky inflation / Structural H4L: 0-50 bps of cuts This is a simple split - you can add more layers too (e.g. deep or shallow recession, etc). The point is that through the option market you can pinpoint what are the market-implied probabilities for each scenario. Today, the bond market thinks the following: - Recession: 20% * 400 bps cuts - Soft Landing: 50% * 150 bps cuts - Sticky inflation / Structural H4L: 30% * 25 bps cuts The weighted average of these probabilities and Fed cuts in each scenario is reflected in that single ~175 bps of cuts you see on the screens. But a lot more information can be extrapolated by looking at single probabilities and scenarios. If you are interested in getting regular and granular updates about these probabilistic scenarios and pricing, ping me (Alfonso Peccatiello) on Bloomberg to try out my macro research.

This week’s FOMC decision was not an easy choice. Our goals are in conflict. Inflation is above target, the labor market is softening, and there are risks to both sides of our mandate—maximum employment and price stability.   Two charts explain why I ultimately favored a rate cut.   The first shows the damaging cost of high inflation. It has chipped away at real earnings and weakened household purchasing power. Many Americans are still trying to catch up.    So, the FOMC must continue to bring inflation down. Anything other than 2% is not an option. But it matters how you get there. This means we cannot let the labor market falter.   Real wage gains come from long and durable expansions. And the current expansion is still relatively young, as shown in the second chart. Holding policy too tight can cause undue harm to American families and leave them with two problems: above-target inflation and a weak labor market.   Congress gave us two goals. And our job is to meet both of them. The recent policy decision puts us in a good place to achieve that.

INDIA GOES OFFLINE, DIGITALLY! The Reserve Bank of India has launched the Offline Digital Rupee, a Central Bank Digital Currency that can move from one wallet to another even without internet or mobile network. Imagine paying for a cup of tea in the Himalayas or for groceries in a rural market where connectivity is zero and still completing the transaction in seconds. ✅ Digital trust has reached a new level. Money that works without the internet is not a product of convenience. It is the evolution of trust. When the value can move offline yet remain verified and authentic, we are witnessing the future of financial inclusion, not just technology. ✅ It solves the last-mile problem. For years, digital payments depended on networks, servers, and gateways. Rural India, remote areas, and even disaster zones were often left behind. The Offline Digital Rupee removes that dependency and gives digital money a physical character. This changes how we think of accessibility forever. ✅ It is faster, cheaper, and smarter. No third-party switches. No failed connections. No dependency on payment gateways. The value moves directly from one device to another, just like cash, but secured by blockchain-based architecture and backed by the central bank. The power of digital efficiency now exists without digital dependence. ✅ Programmable money means purposeful money. The RBI’s Programmable Central Bank Digital Currency model means money can be coded for a reason. Subsidies can be released only for their intended use. Corporate payouts can have specific validity. Social benefits can be tracked transparently. It adds responsibility to the currency itself. ✅ It redefines how economies will interact. Offline CBDC is not just a domestic innovation. It opens the door for new models of cross-border settlements, disaster-resilient financial systems, and new layers of fintech innovation. The world will look at this model as a live example of how technology can merge with human need, not just convenience. ✅ It reminds us what innovation truly means. The right innovation is not when a feature gets smarter, but when it becomes more inclusive. When a person in a no-network zone can transact as easily as someone in a metro city, that is when digital transformation turns into social transformation.

Today marks a decisive turning point for India’s macro-economic direction! The RBI’s Monetary Policy Committee has cut the repo rate by 25 bps to 5.25%, upgraded FY26 growth to 7.3%, and brought inflation guidance down to 2%. What this means and why the shift matters: 1. Relief for borrowers & businesses A lower repo rate typically eases borrowing costs. Expect improved affordability for consumers and enterprises, which can lift consumption and support capex cycles. 2. A rare “Goldilocks moment” With inflation contained and growth estimates rising, we’re seeing a compelling intersection of price stability and demand-side stimulus — a combination that markets don’t get often. 3. Sectoral tailwinds Real estate, infrastructure and discretionary categories often feel the weight of high interest rates. With easier financing conditions, these sectors may see revived investments, improved hiring, and stronger demand. 4. A disciplined policy stance Despite the cut, RBI’s tone remains measured. The stance is neutral, inflation is modest, and the central bank retains room for future data-driven adjustments. From a macro lens, this isn’t merely a rate cut it’s a signal that India is entering a phase where stability and sustained growth can coexist without inflationary overshoot. What I’m tracking next: Transmission of rate cuts to retail lending, movement in fixed capital formation in Q3, consumption patterns in urban + semi-urban pockets, and MSME credit flow. Is this the start of a new growth cycle? I’m inclined to think yes but the next two quarters will tell us more.

In today's Business Standard , Arvind Subramanian, Josh Felman, and I discuss the implications of a significant shift in Reserve Bank of India (RBI)'s exchange rate policy. Although not formally announced, the RBI has effectively pegged the rupee to the dollar since late 2022. Maintaining this peg has come at a steep cost—approximately $200 billion in forex interventions over two and a half years, including $100 billion since September through spot and forward markets. Such a strategy, however, is not without risks. Exchange rate pegs tend to erode competitiveness and bind monetary policy to defending the currency rather than addressing domestic economic priorities. These vulnerabilities leave the rupee exposed. Should markets perceive it as overvalued or anticipate a shift in monetary focus, speculative pressures could mount, forcing a disruptive adjustment. The prudent course for the RBI is to allow a gradual depreciation of the rupee, bringing it closer to equilibrium value. This would free monetary policy to focus on pressing domestic needs while safeguarding India's hard-earned reputation for prudent macroeconomic management. Link to the article: https://lnkd.in/gU-uyqzR

The Reserve Bank of India’s bold move to slash the repo rate by 50 basis points to 5.5%—its third consecutive cut this year—signals an aggressive pivot toward growth stimulation amid easing inflationary pressures. With food inflation softening and core inflation expected to remain benign, the RBI seized the opportunity to front-load monetary easing. The change in policy stance from “accommodative” to “neutral” reflects a recalibrated strategy: while liquidity support continues, the RBI is preparing to remain flexible should inflationary threats re-emerge. The simultaneous reduction in the Cash Reserve Ratio, expected to release ₹2.5 lakh crore into the system, reinforces the central bank’s intent to amplify credit flow and investment activity across sectors. This decision has wide-reaching consequences. Borrowers, especially in the housing and auto sectors, will see substantial relief through reduced EMIs—potentially saving thousands monthly—spurring consumer sentiment and retail spending. On the flip side, fixed deposit investors are already feeling the pinch of falling returns, a trade-off the RBI seems willing to make for broader economic revival. Stock markets have cheered the move, with the Nifty and Sensex posting gains as financials and real estate stocks surged. The message from RBI is clear: with inflation under control and global headwinds persisting, India is choosing to bet on domestic demand, and this rate cut is a calculated push to accelerate the country’s growth engine while keeping inflation in check. #LinkedinNews #Finance #RBI #SanjayMalhotra #MPC #RepoRate

CURRENT TRENDS IN INDIAN BOND MARKETS: INTERVIEW QUESTIONS What is exactly happening? RBI has cut rates cumulatively by 125bps (1.25%) over the last few monetary policy committee meetings. Generally speaking the short term government bond yields react to the monetary policy actions and cool off given the rate cuts. As regards the long term government bond yields, they refuse to cool off despite the rate cuts. Long term yields are affected largely due to the macro economic conditions and also to an extent by the monetary policy actions. PROBLEM: RBI is cutting rates but long term government bond yields aren't cooling off REASONS: 📌 No durable liquidity in the system. RBI recently announced OMOs and $ rupee buy sell swaps. RBI will buy government bonds from the banks and inject rupee liquidity in the system. RBI will also buy $ from the bank and in exchange infuse rupee liquidity in the system. Given the liquidity infusion, generally the yields should cool off. Because the liquidity that gets created in the system finds its way into the Govt bonds. High demand= high prices= low yields. 📣 ALERT In order to curb excess volatility in the rupee, RBI intervenes by selling $ to commercial banks and in exchange sucks out rupee liquidity from the system. Net result? RBIs liquidity infusion measures get nullified. There has to be durable (permanent) liquidity infusion in the system and not transient (temporary) for the long term bond yields to be meaningfully impacted. 📌 Unfavorable tax treatment Bond income is taxed at slab rates. There's no concept of capital gains here so a negative point for bonds and therefore, less demand. 📣 ALERT Generally speaking, long term capital gains are taxed at comparatively lower rates but as I mentioned, this is absent in bonds. 📌 RBI stance Whenever RBI announces the policy, it also mentions the stance. The most recent MPC announced a 25 bps rate cut along with a neutral stance. 📣 ALERT When the stance is accomodative, it means the RBI will support the economy further in the form of rate cuts but when the stance is neutral, RBI might tighten or loosen depending on how the economic situation evolves. The neutral stance has further spooked the bond market participants. 📌 Index Inclusion Once the Indian Govt bonds get included in a global bond index, this will bring in foreign inflows. But this hasn't happened off late. 📣 ALERT The foreign inflows in government bonds will serve dual purpose 1) Cool off the yields due to the demand by foreign investors 2) Support the rupee as well since the foreign investors will demand rupees in exchange for $ to invest in Indian bonds. Follow me (Mihir Dedhiya, CFA, CA) as I share insights about the finance and the CFA® Program. If you want to be a good fixed income professional, your hold on macro economics has to be very strong. #cfa #finance #economics #fixedincome

Cross-Border Payments Are No Longer About Ddollars—They’re About Freedom And Efficiency With Emerging Markets leading the charge, the rules of global finance are about to change forever. The latest report on cross-border payments from OMFIF Digital Monetary Institute highlights groundbreaking developments that could reshape international finance as we know it. Key Insights: > Faith in connecting CBDCs drops sharply : ONLY 13% of survey respondents chose connecting CBDCs as the most promising avenue for improving cross-border payments, down from 31% last year. Only 10% of respondents are working on the concept, compared to 21% last year. However, a further 26% say they intend to start work. > Interlinking IPS most promising avenue for improving cross-border payments (47%), roughly the same share of respondents in the 2023 survey. > Emergence of Multi-Currency CBDCs: Central banks worldwide are exploring multi-currency central bank digital currencies (CBDCs) to enhance efficiency and reduce costs in cross-border transactions. > Project mBridge: This pioneering platform, involving central banks from China, Hong Kong, Thailand, UAE, and now Saudi Arabia, aims to streamline cross-border payments using distributed ledger technology. > Geopolitical Implications: The shift towards multi-currency CBDCs and platforms like mBridge could challenge the dominance of traditional systems like SWIFT and the US dollar. > The hub-and-spoke model for CBDC interoperability is emerging as a favored framework, ensuring smoother integration across regions. >While the dollar still reigns supreme, countries are actively exploring alternatives to reduce dependency and increase financial autonomy. Key Stats: > 10% of survey respondents are actively working on multi-currency CBDC platforms. > 26% plan to explore these platforms in the future. > 11% of central banks aim to reduce the share of cross-border trade settled in dollars. My Insights from the Report: 1/ Emerging Markets Taking the Lead: Platforms like mBridge signify a new era where emerging markets could shape global financial norms, reducing reliance on Western-centric systems. 2/ Geopolitical Implications: The shift toward CBDCs and alternative systems may redefine global power dynamics in finance, particularly with the BRICS bloc's ambitions. 3/ The Role of Interoperability: Success in CBDC adoption will hinge on interoperability models, with the hub-and-spoke approach offering the most practical path forward. 4/ Strategic Autonomy: Countries are increasingly seeking to reduce their reliance on the US dollar and Western financial systems, aiming for greater sovereignty and control over their financial transactions. What are your thoughts on the future of cross-border payments? Let us know by sharing your thoughts in the comments below