US interest rate cut: Impact on Azerbaijan and Global Economies

The US Federal Reserve's (Fed) decision on interest rates is set to be released today at 2 p.m. EDT (18:00 GMT), or 10 p.m. Baku time, along with updated economic projections. This decision marks the Fed's first expected rate cut after a prolonged period of raising rates to tackle high inflation.

Market forecasts are divided. The Fed may lower interest rates by either 0.25 percentage points or 0.50 percentage points. Most predictions lean towards a 0.25 percentage point cut, reducing the rate from 5.50% to 5.25%. However, some economists and investors believe a more significant cut of 0.50 percentage points might be necessary to stimulate economic growth. Analysts anticipate a total rate reduction of at least 1 percentage point (100 basis points) by the end of the year.

What might the potential worldwide repercussions be?

While Americans will be directly affected, central banks with currencies tied to the dollar will also see an impact. For international investors in US stocks, a rate cut is generally positive news. Lower interest rates tend to boost stock prices by reducing borrowing costs for companies and making savings accounts less attractive compared to equities.

Taking into account that there are less than two months left for the presidential elections in the U.S., the FED will start lowering the highest interest rates on such an eve. Inflation in the US has approached the central bank's 2% target. By lowering interest rates, the Fed wants to support economic growth and preserve job growth along with it. Republicans and Democrats have been watching this Fed's moves closely for two years, and a cut will likely help Democrats as the party in power. But Fed Chair Jerome Powell has said time and again that the bank is focused on economic data, not politics, in making its move.

US job growth remains positive despite a slowdown, and recent retail sales and industrial production data have surpassed expectations. The Fed has maintained the discount rate at its current range of 5.25-5.50% for 14 months.

Impact on Azerbaijan, what to expect?

Overall, the direct impact on Azerbaijan might be moderate compared to larger economies. The Central Bank of Azerbaijan (CBA) has indicated that inflation is generally stable and projected to remain within the target range, while annual inflation increased slightly in August and September, it stayed within the target range of 4±2%. CBA expects inflation to remain within the target range through 2024 and 2025, with future interest rate decisions influenced by inflation dynamics and risk factors. The next decision on the interest corridor is set for October 30, 2024, whereas global monetary shifts could be expected after tonight's decision on interest rates. In addition, note that the Central Bank of Azerbaijan (CBA) operates a fixed-exchange rate regime, with the manat pegged to the US dollar. But ultimately the Fed will release a chart showing what its members predict, which could help shape that picture.