The effect is no longer the same: how the US Federal Reserve rate will affect the Russian economy

Officials of the US Federal Reserve System (FRS) have lowered the benchmark interest rate by a quarter of a percentage point and outlined the possibility of two more cuts this year. Russian experts believe that although the American bet on the Russian market and economy is not directly affecting now, the indirect effect can be significant. Details can be found in the Izvestia article.

Trump demanded half

The reduction of the base rate to 4-4.25% came after many months of active pressure from the White House to reduce the cost of borrowing. Yields on U.S. bonds are close to multi-year highs, which complicates the task of financing the budget deficit. The administration of Donald Trump and the American president personally pointed out that the labor market is weak, and the real rate is too high, higher than during the presidency of Joe Biden.

The decision was made almost unanimously, by 11 votes to 1. The only one who opposed it was Trump's nominee Stephen Miran, who was newly appointed by the Senate to the Board of Governors of the Federal Reserve. Like the administration as a whole, Miran proposed to reduce the rate immediately by half a percentage point. Trump's two other nominees to the Board of Governors, Christopher Waller and Michelle Bowman, who voted for a rate cut at the July meeting, joined the consensus this time. At the same time, the Fed will sell bonds and other debt instruments from its own balance sheet, which will partially cancel efforts to mitigate PREP.

The Fed's new median forecast now assumes two more interest rate cuts by 25 basis points by the end of the year, to 3.6% (the middle of the 3.5-3.75% range). Thus, the rate may decrease by 75 basis points (0.75 percentage points) this year. The previous forecast suggested a decrease of half a percentage point.

What has changed?

In the past, Russia's attention has been focused on the Fed's rate. As a rule, its change had the strongest impact on the Russian markets, and in the medium term, on the economy as a whole. Now, after the massive outflow of foreign investors from the Russian market and Russia's overall lower dependence on market conditions in the West, the impact of the Fed's monetary policy actions is not so significant. However, indirect effects remain, explains Evgeny Grankin, Head of the Macroeconomic Analysis Department at Gazprombank's CEP.

— In the past, the effect of the Fed rate cut was to increase capital inflows to emerging markets, which led to increased demand for national currencies. After 2022, foreign investors' access to the Russian financial market turned out to be limited, so the former direct channel of influence of the Fed rate on the Russian economy practically does not work, the economist is sure.

According to Grankin, indirect mechanisms are more important in these conditions.

— First of all, a Fed rate cut usually weakens the dollar against a basket of other countries' currencies. This may mean additional support for the ruble, as the overall demand for dollars in the world is decreasing and the purchasing power of partner countries in national currencies is growing. Secondly, the Fed's more lenient policy stimulates demand for commodity assets (oil, gold, metals), the expert clarifies.

According to him, this is a positive factor for Russia, increasing export revenues. Thus, the impact of US interest rates on the Russian economy remains, but the mechanisms of this influence are changing.: The role of capital flows is decreasing and the role of income from foreign trade is growing. The general dynamics of the dollar in relation to the currencies of trading partners also affects.

Good for raw materials

As Evgeny Goryunov, head of the Monetary Policy Laboratory at the Gaidar Institute, noted, the rate cut was expected.

— The rate decision itself hardly has any impact on the Russian economy and financial markets. But it should be borne in mind that the Fed's decision is always conditioned by the current state of the American economy and significantly affects global markets," the expert explained.

He added that the rate cut will not directly affect our country in any way, but what caused it (rising unemployment, declining investment and consumption in the United States) indicates signs of a slowdown in aggregate demand in the United States.

— This means that global prices are likely to continue following the downward trend that formed in the second half of 2024. In this situation, one should not expect a strengthening of the ruble and an increase in foreign exchange earnings from exports, therefore, the Bank of Russia has an additional argument in favor of a pause in the policy easing cycle.

As Anton Tabakh, chief economist at Expert RA rating agency, noted, the consequences of the Fed's decision have become less severe, but the connection with global markets has not gone away.

— The transfer of effects from American monetary policy to the Russian economy has become slower and works more through commodity markets than currency markets. Therefore, in general, a reduction in the rate is favorable for raw materials and means for our economy. But the same trade wars can nullify and greatly blur this effect," the expert added.