The expectation of the Federal Reserve to cut interest rates has intensified. Where will the global economy head?

Recently, the US CPI rose by 2.9% year-on-year in August, and the number of initial jobless claims soared to a level not seen in nearly four years. Various signs indicate that the US economy is facing certain pressure, which has strengthened the expectation for a rate cut by the Federal Reserve. The market now predicts a 91%-94% probability of a 25 basis point rate cut by the Federal Reserve at its meeting on September 16-17. According to the forecast, the Federal Reserve will conduct its first rate cut since 2025 at the meeting on September 16-17, adjusting the federal funds rate to 4.50% - 4.75% range. As one of the most important central banks in the world, the monetary policy direction of the Federal Reserve has always had a profound impact on the global economy and financial markets. The strengthening of this expected rate cut has attracted widespread attention, and its influence will be multi-dimensional and far-reaching.

I. The Reconfiguration of Global Capital Flow Patterns

Once the Federal Reserve cuts interest rates, the yield of US dollar assets may decline. This will prompt global investors to re-examine their asset allocation, reduce their preference for US dollar assets, and instead seek other assets with higher yields. A large amount of capital may flow to emerging markets and developing countries. After receiving capital injection, these regions can to some extent alleviate financing pressure and provide funds for infrastructure construction, enterprise expansion, etc., promoting economic development. For example, during the past interest rate cut cycle of the Federal Reserve, the stock and bond markets of emerging markets often attracted a large amount of foreign capital inflow, stimulating the activation of local financial markets.

However, the volatility of capital flows will also increase significantly. For some countries with relatively fragile economic and financial systems, they may struggle to effectively respond when facing large-scale rapid inflows and outflows of funds. The rapid outflow of funds could lead to a sharp decline in asset prices in these countries, triggering financial market turmoil and even potentially causing debt crises. For instance, some emerging market countries have heavily borrowed in US dollars. If the US dollars flow back, the cost of debt repayment will rise significantly, and the risk of debt default will intensify.

II. Intensified Fluctuations in the Exchange Rate Market

Interest rate cuts usually weaken the strong position of the US dollar, leading to a decline in the dollar's exchange rate. The depreciation of the US dollar makes the prices of American goods relatively lower in the international market, enhancing the export competitiveness and facilitating the expansion of US exports and the improvement of the trade deficit situation. However, for other countries, their currencies appreciate relative to the US dollar, which causes the prices of their export goods to rise and makes export more difficult.

For some countries that heavily rely on imported energy and raw materials, a depreciation of the US dollar will lead to an increase in the prices of imported goods, raising the production costs of enterprises and thereby pushing up the price level, triggering the pressure of imported inflation. The central banks of these countries may have to make a difficult choice between stabilizing the exchange rate and controlling inflation. If they intervene in the market to stabilize the exchange rate, they may consume a large amount of foreign exchange reserves; if they adopt tight monetary policies to control inflation, they may also suppress economic growth.

III. Global Financial Market Interconnection

In the stock market, a reduction in interest rates is a major positive for enterprises. Lowering the financing costs for enterprises means a reduction in their interest expenses and an expansion of their profit margins. This will drive the stock market to rise, especially for industries that are sensitive to interest rates, such as real estate, utilities, and technology growth sectors, which may have better development opportunities. However, if the interest rate reduction is due to excessive downward pressure on the economy and poor future profit expectations for enterprises, the stock market rise may only be short-term and may still face the risk of a correction in the future.

In the bond market, bond prices and yields have an inverse relationship. When the Federal Reserve cuts interest rates, it leads to a decrease in market interest rates, making previously issued high-yield bonds more attractive. Bond prices rise and bond yields fall. This is good news for bond investors, especially for those of long-term bonds and investment-grade corporate bonds. Sovereign bonds in emerging markets may also benefit from improved global liquidity. However, if the economic outlook is uncertain, investors' concerns about risks intensify, and they may sell bonds, causing fluctuations in the bond market.

The gold market usually performs well under the expectation of a Fed rate cut. The rate cut reduces the opportunity cost of holding gold, and economic uncertainty enhances the hedging attribute of gold, attracting investors to buy gold for preservation and appreciation. Recently, the price of gold has risen strongly, with both COMEX gold futures and London spot gold prices reaching new highs repeatedly. This is a direct response of the market to the expectation of a Fed rate cut.

IV. Changes in the International Trade Landscape

The depreciation of the US dollar makes the prices of US export goods more competitive, and the share of US enterprises in the international market may expand. This will have an impact on similar export enterprises in other countries, changing the global trade competition pattern. For example, the exports of US agricultural products and mechanical equipment may increase, and they will compete with other major exporters of agricultural products and machinery.

For other countries, an appreciation of their currencies leads to a relative decrease in the prices of imported goods, which is beneficial for expanding imports. However, it may also have an impact on their domestic related industries. Some countries may take trade protection measures to safeguard their domestic industries, which will undoubtedly intensify global trade frictions and is not conducive to the development of global trade liberalization and economic globalization.

The strengthening expectation of the Federal Reserve's interest rate cut has an intertwined impact on the global economy. For all countries, they need to closely monitor the monetary policy trends of the Federal Reserve, formulate reasonable policies based on their own economic conditions, and respond to various risks and opportunities that may arise, in order to maintain stable economic growth in the complex and volatile global economic environment.