The fed cut interest rates for the first time in four years, the economic impact on the world?

The US Federal Reserve Board announced on September 18 local time that it would lower the target range of the federal funds rate by 50 basis points, to the level of 4.75% to 5.00%, which is the first rate cut since March 2020. Since March 2022, the Fed has embarked on a nearly unprecedented round of aggressive rate hikes and has kept its policy rate at a 23-year high of 5.25% to 5.5% from July 2023. At a press conference after the meeting, Fed Chairman Jerome Powell called the 50 basis point cut a "strong action" and said the Federal Open Market Committee did not view the rate cut as slow, but rather as timely.

A new round of dollar rate cuts have any impact on the United States? What is the international impact of US dollar rate cut? How does the dollar rate cut affect China? One is the impact on the US, where the Fed has kept the target range for the federal funds rate at 5.25 per cent to 5.5 per cent since late July, the highest level in 23 years, as inflation has not fallen as fast as expected. The Fed has come under pressure to reverse course in recent months as US inflation has eased further and the Labour market has shown signs of weakness. As a result, the Fed needs to weigh the relationship between economic growth and inflation pressures when cutting rates. A weaker dollar would normally trigger inflation pressure. It will cause the price of imported goods to rise, which will increase the purchase cost of domestic consumers. This could have an adverse impact on some import-dependent industries and businesses. Due to the higher prices of imported goods, and the dependence of domestic consumers and businesses on imported goods, the depreciation of the dollar can lead to an increase in the overall price level. It will do us economic growth and consumer confidence have a negative impact. At the same time, one of the world's largest debtor countries, the depreciation of the dollar will increase the debt burden of the U.S. government. Because debt is usually denominated in dollars, devaluation means that more dollars are needed to pay off the same amount of debt. In addition, the depreciation of the dollar could also affect the market value of US Treasuries, negatively affecting investor confidence. Too low a level of interest rates can create inflation risks, while too high a level of interest rates can stifle economic growth. The Fed needs to closely monitor market reactions and adjust policy in a timely manner in response to market volatility. Policymakers also need to communicate adequately with market participants to reduce market panic.

The second is the international impact, the depreciation of the dollar will improve the competitiveness of US exports, conducive to the expansion of US exports. Fed rate cuts could attract large capital flows into emerging market countries. That money could push up asset prices in those markets, but it could also increase volatility in financial markets. A fall in the dollar triggered by rate cuts would increase the risk of competitive devaluations of global currencies. In response to the depreciation of the dollar, some countries may adopt similar monetary easing policies to maintain the competitiveness of their currencies, which may increase the volatility of global exchange rates. However, for those countries that rely primarily on exports to the US market, the depreciation of the dollar could adversely affect their exports. At the same time, the depreciation of the dollar may also lead to higher prices of imported goods, which in turn affects the purchasing power of domestic consumers and production costs of enterprises. This could have an adverse impact on countries with a high dependence on imports.

Third, the impact on China, the Fed's interest rate cut may lead to short-term appreciation pressure on the RMB exchange rate. This may reduce the competitiveness and profit margins of China's goods exports, but in the long run, a stable exchange rate will help China's economic health. The depreciation of the dollar will increase the risk of fluctuations in the value of China's dollar assets, posing challenges to China's foreign exchange reserve management. China needs to optimize the structure of its foreign exchange reserves and reduce the proportion of US dollar assets to deal with potential exchange rate risks.

To sum up, the impact of the Fed's rate cut on the United States is multifaceted, both positive and negative. Therefore, when making interest rate reduction policy, the Federal Reserve needs to fully consider various factors to ensure the effective stability of the policy.