Why the entire global financial sector will be watching the US Federal Reserve on Wednesday ?

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The global financial sector is now closely watching the Federal Reserve. All eyes are on the U.S. central bank's decision next Wednesday regarding a potential interest rate cut. This highly anticipated move will not only affect the United States but will have repercussions worldwide. Even the strength or weakness of the dollar will depend on the Fed’s decision. In an effort to control inflation, the Fed has been raising interest rates for a long time, and they are now at their highest level in years. According to Reuters, there is still no clear indication of how much the interest rate will be reduced in what will be the first cut in several years. Additionally, the upcoming presidential election at the end of this year adds to investors' concerns.

Kenneth Broux, head of corporate research for FX and rates at Société Générale, said, 'We don’t know what this trend will look like. Will it be like 1995, when rates were cut by 75 basis points, or will it resemble 2007–08, when rates were slashed by 500 basis points?' Let’s take a look at the global financial market’s expectations: Read more 

1. Following the Leader

Last spring, U.S. inflation was higher than expected. Investors wondered how much the European Central Bank or the Bank of Canada could reduce rates if the Fed didn’t cut policy rates. In the end, the U.S. cutting rates will provide relief to weaker economies.

The anticipation that the Federal Reserve will cut interest rates has already encouraged other central banks to reduce their rates. However, rate cuts in Europe will be smaller than those of the Fed, as the European Central Bank and the Bank of England have expressed caution regarding inflation.

For the bond market, a rate cut could be a blessing. For the first time since the end of 2023, interest income on U.S., German, and British government bonds is expected to decline. Read more 

2. A Place of Relief

For central banks in emerging countries, a U.S. rate cut would bring much-needed relief. This would allow them to provide more support for economic growth. Reuters has gathered information on 18 emerging economies, half of which have already started reducing rates in anticipation of the Fed’s move.

However, the uncertainty surrounding the U.S. presidential election is also a major concern. BNP Paribas official Trang Nguyen said that the U.S. election will be an important factor, and the disparity in fiscal policies has made this rate-cutting cycle more complex… Read more 

3. Dollar Weakness

Countries hoping for a weaker dollar as a result of U.S. rate cuts, which would strengthen their currencies, may be disappointed. Investment bank JPMorgan reminds that in three out of the last four Fed rate-cutting cycles, the dollar initially strengthened.

The value of the dollar will depend on how the U.S. rate cut compares to others. If the dollar doesn’t become a low-yield currency, it will remain attractive to non-U.S. investors.

However, many Asian countries have already cut rates ahead of the U.S. As a result, the South Korean won, Thai baht, and Malaysian ringgit rose in July and August. The depreciation of the Chinese yuan against the dollar throughout the year was also offset during that time. Read more 

4. Equity Surge

Global investment in equities had stumbled due to uncertainty surrounding economic growth in various countries. If U.S. rates are lowered, economic activity will pick up, potentially leading to a rise in equity investments. After weak U.S. employment figures were released in August, global stock markets fell by 6% over the next three days. Read more 

5. Bright Days Ahead

A Federal Reserve rate cut could benefit precious and base metals. Lower rates and a weaker dollar could encourage investors to buy various metals, pushing up the price of commodities like gold. As bond yields decline, gold prices tend to rise, as investors turn to gold as a safe haven.

Gold is currently at a record high. John Reed of the World Gold Council said that investors should remain cautious when buying gold Read more