Inflation and Monetary Policy

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.

More good news for Powell paves way to Sept cut #Inflation has had many fits and starts over the last 2 years, but the overarching trend has been lower. After a similarly cool May report, the June CPI further suggested that progress is getting back on track to the Fed’s 2% goal. Headline CPI dipped -0.1% while core inflation rose just 0.1% (both below expectations), bringing their annual rates to 3.0% and 3.3%. Together with the moderation of wage growth and the uptick in unemployment to 4.1% last week, this report strengthens the likelihood of a September rate cut. Among the highlights: ➡️ The biggest help came from shelter which cooled to 0.17%, compared to its average run rate this year of 0.45%. OER softened and lodging away from hotel (i.e. hotels) also fell 2%. ➡️ Auto insurance bounced 0.9% after it dipped -0.1% last month, which was its first break in a long streak of upward climbs. The annual rate is gradually easing from very high levels, but the moderation in auto prices and vehicle repair costs suggests scope for further progress. Car insurance rates generally do not decline and state filings for rate increases earlier this year are still trickling through, but rates should still stabilize over the next year. ➡️ Energy prices fell another 2%, reversing gains from the spring. This was led by -3.8% in gas and -0.7% in electricity, while gas utilities bounced +2.4%. Food inflation was also modest. ➡️ Other consumer goods prices cooled with new cars -0.2%, used cars -1.5% and apparel +0.1%--but the bigger surprise was airfares which dropped 5%. Recent commentary from airlines suggest summer travel demand remains strong, but pricing power is waning and companies are treading more carefully with capacity increases. ➡️ With this release, we forecast headline PCE rose 2.4% y/y in June—not very far from the Fed’s target. Earlier this week, Chair Powell spoke before Congress and delivered a somewhat dovish message. He repeated a similar upbeat tone on inflation progress (still needing “more good data”), but he gave the recent softness in the labor market more attention. We take this to mean the #Fed appreciates the risks growing on the employment side of its mandate and with “more good data” on inflation, the Fed's pathway to a September cut just got even clearer. In response to this release, market expectations for a rate cut in September rose to essentially 100% vs. 70% before the release, leading treasuries to rally across the curve. Stock markets were mixed with #disinflation sparking a rotation from the momentum/big tech names towards value and cyclical sectors. Powell speaks again on Monday and if he strikes an even more dovish tone than his comments to the Senate, this performance could continue.

Time to sound the alarm: our “Fed cuts checklist” conditions are now met - and likely very close to what the Fed needs to make a first rate cut. The Fed cares about two things: price stability and full employment. To justify a cut, we expected they’d need to see (1) long and short term #inflation expectations well anchored, (2) core PCE is moving towards 2.0%, with confidence, (3) the unemployment rate is above 4.0%, and (4) wage growth is commensurate with medium term price stability. For the last two years, only condition #1 was consistently met. But over the course of the last 3 months, the rest of the conditions have finally come in line. Today's #CPI print was a big step in that direction. Price growth came in below expectations, contracting 0.1% in headline terms and growing a little under 0.1% in core terms. Underneath the surface: energy prices declined, core goods are feeling pressure from deflation in e-commerce and increasing price wards, discretionary services are seeing a a little more pressure on pricing power as competition increases, and shelter is - finally - normalizing. Non-discretionary inflation - things like insurance and medical costs - are posed to be a major remaining source of "stickiness". In his speeches and testimony in the past week, #Powell signposted that April is when started counting inflation figures as getting better. That would make Thursday’s data the third month of “better” data and the second month of “good” data. Powell’s testimony suggests they’re looking for three good reports before cutting. We believe this means they'll want to see one more constructive data point in each category to confirm their confidence in cutting rates. That takes July off the table but makes September very much live.  Initial #Fed rate cuts tend to be "relief" moments for the market, until the reason for those rate cuts - a slowing economy - come to bear. For investors that can be tactical, we believe that the #equity market rally can continue until more pronounced signs of slowdown occur. We watch for a durable rise in jobless claims or a deterioration in earnings expectations as key market signals - neither of these are flashing red today. We also believe that the first Fed rate cut will be a pivotal signal for money sitting on the sidelines. Cash rates move lower (meaning a lower total return from money market funds), the opportunity shot clock to lock in higher rates starts dissolving, and, over time, the yield curve normalizes, reducing the risk of moving further out on the curve.   We think the first of those factors is most important for investors today. As our research has shown, the best time for investors to move is 2-3 months before a Fed pivot, so investors can capture conditions before the market catches up to the rising likelihood of policy change. The time to move may be near...

The Reserve Bank of India has released a Discussion Paper (DP) on the Review of the Monetary Policy Framework. The current inflation target under the flexible inflation targeting (FIT) regime is due for review in March 2026. The DP poses the following questions for feedback: 1.      Whether headline inflation or core inflation would best guide the conduct of monetary policy, given evolving relative dynamics of food and core inflation and the continuing high weight of food in the CPI basket? 2.      Whether the 4 per cent inflation target continues to remain optimal for balancing growth with stability in a fast growing, large emerging economy like India? 3.      Should the tolerance band around the target be revised in any way including whether the tolerance band be narrowed or widened or fully done away with? 4.       Should the target inflation level be removed, and only a range be maintained within the overall ambit of maintaining flexibility without undermining credibility? RBI is inviting comments from stakeholders and the public by September 18, 2025. https://lnkd.in/gFnPjP8y

3% inflation, that's likely to rise to 3.5%, will make the Bank of England uncomfortable and Governor Bailey will be wetting his ink for his first letter to Rachel Reeves. But here's three reasons why the MPC won't be panicking about todays jump in inflation. First, as expected, the jump in headline inflation was driven by rising education prices (due to the VAT increase), a rise in petrol prices, and a big jump in airfare inflation (this has much more to do with date that the ONS looks at flight prices than underlying price increases). The big upward surprise came from a jump in food prices. But none of these factors tell us much about underlying inflation and are either one-offs (tax rises) or external factors (oil prices) so won't really worry the MPC. Second, services inflation, which the MPC cares much more about than headline inflation as it is more reflective of domestic price pressures, was a bit weaker-than-expected, although that did still rise as well. So despite a big jump in headline inflation, domestic price pressures aren't quite as strong as the MPC expected. Third, rising energy prices will be the main driver of higher inflation over the next few months, but fast forward to next year and inflation looks much weaker as these one-off effects start to fall out of the annual comparison. It's this medium term outlook that the MPC is more concerned with. The MPC will therefore stay on its "careful and gradual" rate cutting path. The big risk here is that wage growth remains exceptionally high, which prevents services inflation from falling and will stop the Bank from cutting rates. For now though, we're still expecting three more cuts this year. #RSMUK #RealEconomy #Inflation #InterestRates

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

The Federal Open Market Committee (FOMC) has strongly signaled that they won’t cut the Federal Funds Rate until September at the earliest, and likely only once in 2025 (unless the employment data shows significant deterioration). One reason for this is the FOMC is quite worried about sharp increases in inflation expectations exhibited by both consumers and businesses. Two charts below show these dynamics. Thoughts: •The top chart shows the median point prediction for the year-over-year inflation rate one year from now from the New York Fed’s Survey of Consumer Expectations (https://lnkd.in/g4Tsdtej). As recently as November, inflation expectations were back to 3%, which was the stable, pre-COVID level. Since then, inflation expectations have surged to 4.79% as of April. We know the culprit: tariffs. •The bottom chart shows the expected change in prices paid over the next 12 months for inputs from the Richmond Fed’s manufacturing survey (https://lnkd.in/gvHt3VQa), with data through May. While May’s reading came down to 6.75% from 8.38% in April (likely due to the China tariff pause), we can again see a sharp increase in inflation expectations that can only be due to one thing: tariffs. •Why do inflation expectations matter? In the FOMC’s mind, inflation expectations can turn into a self-fulfilling prophecy. For example, if firms expect to pay more for inputs, it makes it easier for suppliers to raise prices. While I think inflation expectations are often incorrectly predicted (e.g., consumers in 2022 were expecting 8% inflation over the next year, something that certainly didn’t come to pass), the FOMC gives these data weight in their decisions on the Federal Funds rate. Implication: the impact that tariffs have had on inflation expectations this time around, relative to 2018 and 2019, has been far more pronounced. Such increased expectations make the FOMC less likely to cut interest rates before multiple additional months of CPI, PPI, and PCE data are available (barring a sharp deterioration of the job market). I'll be curious if the ruling of the Reciprocal and Trafficking tariffs as unconstitutional has any effect. #economics #markets #supplychain #ecommerce #freight

“Water water everywhere, nor any drop to drink.” I first heard The Rime of the Ancient Mariner recited by a famous actor while in grade school. That image came to mind as I thought about the deluge of data we are about to get. It will fall short of quenching our thirst for information on the economy, and is adding to the argument to pause on rate cuts by the Federal Reserve. The October CPI cannot be backfilled due to a loss in survey information. The same goes for the Household survey, which is used to calculate the unemployment rate, and is chock-full of data on how well the labor market is performing for all kinds of workers. The November surveys will be done late and could have holes. We were already imputing 40% of the CPI in September due to staffing shortages at the Bureau of Labor Statistics; many field offices that collected data have closed. The Fed is left with a dueling instead of a dual mandate and a scarcity of new data to give clarity on the direction of inflation and the labor market. Chairman Jay Powell warned that a December cut was “not a foregone conclusion” for this very reason. The warning followed a contentious October cut. The CPI for September came out cooler than feared. But price hikes became more dispersed, showing up outside of areas affected by tariffs in the service sector. Making matters more complicated are record tax refunds, which will hit in ealry 2026. That is a double-edged sword as we saw during the pandemic. Fiscal stimulus cushions the blow of higher prices, while fueling inflation. Proposed rebates on tariffs would increase those risks, while adding to deficits. We cannot sustain full employment without price stability. Any short-term gains in employment due to rate cuts could be quickly wiped out by resurgent inflation. Further muddying the waters is whether the weakness in the labor market going forward is structural - due to aging demographics, curbs on immigration and innovation - or cyclical. Structural losses are harder to reverse via rate cuts. Financial conditions for large companies, which are announcing major layoffs, remain extremely easy. That means additional rate cuts run the risk of stoking more inflation instead of employment. Inflation is corrosive and hits 100% of the population, while unemployment hits only a few percent of the population. Both are bad - they are worse together. We have not had to deal with both since the 1970s. The Fed mistakenly cut too much back then, which is informing their decisions today. The Rime of the Ancient Mariner is a story of redemption and penance. The Fed’s reputation on inflation needs redeeming. The penance is slower cuts in rates than most would like. A pause in December is likely. The trajectory of rate cuts thereafter will depend on more complete data on the economy and shifts in Fed leadership. Moral of the story: A loss of data leaves us thirsting for more and has left the Fed with no risk-free policy choices.

Pondering the Fed's Next Move - let me jump to the conclusion: The Fed is unlikely to cut rates anytime soon and market expectations continues to be wrong. I expect the FOMC to delay policy easing until inflation data falls to its 2% target, or employment/economy show a marked decline. Economist and the financial markets have concluded that inflation is on a glidepath towards the Fed’s 2% target (CPI/PPI currently in the 3-4% range). If inflation declines to 2% in the coming year, it’s likely the result of lower demand, or slower GDP growth rates. It is remarkable that we could be talking about a 2% inflation path given the resilience of GDP and employment growth rates. The Federal Reserve’s economic models suggest that a neutral Fed Funds rate is one that is consistent with 2% inflation and full employment. If we arrive at this point, there will be no need to cut rates at all, a condition that the economic models will surely support. In other words, with growth and 2% inflation, current Fed Funds might just be necessary, negating a pivot to lower rates. The Fed will move slowly. Remember, these are the same policy folks who made significant output errors with respect to their inflation forecasting models, so they might be hesitant to lower rates too quickly, especially since employment and economic growth remains resilient. Fed policy makers are asking themselves this question: if we lower rates, will this policy action re-stimulate inflation and growth? If you were Powell, what would you do under these circumstances? Currently, inflation remains stubbornly above the Fed’s target, so I don’t expect the Fed to cut rates until we see material economic weakness which will likely not be confirmed prior to its June ’24 meeting. What makes this particularly tricky for the Fed is that after June, its subsequent meetings are July 31 and September 18, just prior to the U.S. Presidential Election. The Fed certainly does not want to be appear political by easing right prior to the November 5th election. If the Fed don’t move by June, might they wait until the November 7th meeting, which falls 2 days after the election? This game theory presents an interesting dynamic, and avoiding politics is precisely why Chairman Powell emphasizes that the Fed remains data dependent. Chairman Powell acknowledges the progress on inflation, but suggests restrictive monetary policy will be warranted, thus implying ‘Higher for Longer’. Chairman Powell: "Recent declines in measures of underlying inflation, stripped of food and energy prices, were welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably... Restrictive monetary policy will likely play an increasingly important role. Getting inflation sustainably back down to 2% is expected to require a period of below-trend economic growth as well as some softening in labor market conditions."

The takeaway from today's #federalreserve decision is that while core inflation has surprised to the upside so far in the first quarter, not much has changed for Chair Powell and many of his colleagues on the FOMC. I think the markets rightly viewed the days events as dovish, hence the rally in stocks and bonds. Looking at the Summary of Economic Projections. The median barely held on at three cuts. Had another person shifted, we would have been at two cuts. Nonetheless, GDP was revised up, core inflation was revised up (higher NGDP) and the median dot was still unchanged. Should inflation surprise to the downside between now and March, we could see the median solidify somewhat. Powell struck a number of important themes at his press conference. First, inflation is about the fundamental path. Thus, he did not get too excited about the downside surprises in H2 2023 and is not too concerned about the upside surprises so far this year. The upside surprise can be seen as a reason not to cut in March, but not a reason to not think about cuts this year. Second, Powell had a chance to push back against the easing of financial conditions we've seen so far this year. He did not take the bait. Talk about revealed preferences. Third, strong growth won't necessarily push the Fed away from cutting rates. This is perhaps a sign that Powell sees a stronger supply-side backdrop. At any rate, tolerating stronger growth is dovish, all else equal. The risk for the Fed is that January and February's inflation data represent a series of higher than expected inflation prints. I get the risk, but ultimately, Powell sees the stance of monetary policy as very restrictive. As a result, he's more on alert for downside surprises to growth than he is upside surprises to inflation.