How the Fed's first rate cut in four years affects financial markets and the global economy
1. Increased global liquidity When the Fed cuts interest rates, borrowing costs become lower, encouraging businesses and individuals to borrow more. This increases liquidity in financial markets, leading to a boom in investment and spending activities. Cheaper money not only affects the US economy but also creates capital flows to international markets, especially emerging markets.
2. Depreciation of the USDLow interest rates make the USD less attractive to investors, as they receive lower returns from holding USD assets. This can lead to a weakening of the USD against other currencies, which helps boost US exports but puts pressure on other countries, especially those that rely heavily on exports.
3. Rising Risk Asset PricesLow interest rates encourage investors to seek higher returns from riskier assets such as stocks, corporate bonds, and real estate. This can lead to strong growth in the stock market and other assets, but also poses the risk of creating asset bubbles if growth overheats.
4. Impact on commodity markets When the US dollar weakens, commodities such as oil, gold, and precious metals often increase in price, since these commodities are priced in US dollars. Higher commodity prices can affect production costs and inflation in many major importing countries.
5. Increased pressure on other central banksWhen the Fed cuts interest rates, other central banks may be pressured to follow suit to maintain competitiveness and exchange rate stability. Otherwise, their currencies may become too strong, negatively affecting exports and international competitiveness.
In short, the FED's interest rate cut not only affects the US economy but also spreads globally, with impacts on capital flows, exchange rates, commodity prices, and asset markets.
