Why do the Fed's interest rate cuts have such a significant impact?
(1) What is the Fed?
The Fed is the central banking system of the United States, consisting of 12 regional Federal Reserve Banks.
Its goal is to stabilize prices and maximize employment through monetary policy adjustments. Inflation and employment data are important indicators of economic health and are closely watched by investors and market participants to gauge economic prospects and investment risks.
As the central bank of the United States, the Fed has a significant impact on financial markets.
(2) How does it exert this influence?
The main monetary policy tool is to adjust interest rates, that is, to raise or lower interest rates:
Raising interest rates increases the cost of borrowing between banks, thereby raising loan interest rates for businesses and individuals. When the Fed raises interest rates, the deposit rate of the US dollar will rise, attracting capital into the United States, reducing investment in other countries, and may worsen economic conditions and increase unemployment. Higher interest rates also increase borrowing costs and increase the risk of corporate and individual defaults, which may lead to corporate bankruptcy.
Lowering interest rates will have the opposite effect, lowering deposit rates and borrowing costs. When the Fed cuts interest rates, the deposit rate of the US dollar will fall, prompting capital to flow out of banks and flow to other countries, thereby promoting global investment and economic recovery.
