The profound impact of the "dollar tide" on the global economy

The US Federal Reserve (Fed) recently announced a major change in monetary policy, lowering the target range for the federal funds rate by 50 basis points to between 4.75% and 5%. This move marks the first rate cut by the Federal Reserve since March 2020, and also indicates a major shift in US monetary policy from a tightening cycle to an easing cycle. This decision not only triggered widespread discussion in the United States, but also set off waves in the global economic field, especially the "dollar tide" effect, which will have a far-reaching impact on the global economy.

As the world's most important reserve currency, the change of the liquidity of the US dollar has a decisive impact on the global economy. For a long time, the core position of the US dollar in the international financial system has made global commodity trading, cross-border investment and foreign exchange reserves highly dependent on the US dollar. This dependence is particularly evident when dollar liquidity increases or decreases.

This rate cut by the Federal Reserve has directly led to an increase in dollar liquidity. In the short term, this may seem like a shot in the arm for the global economy, but in fact, the subsequent effects are complex and far-reaching. On the one hand, the abundant liquidity of the US dollar can help ease the financial strain in some countries and regions, promote investment and consumption, and thus have a positive effect on economic growth. On the other hand, a surge in dollar liquidity could also trigger sharp volatility in global financial markets. Driven by the pursuit of higher returns, capital will accelerate its flow around the world, leading to large fluctuations in asset prices and increasing investment risks.

In addition, increased dollar liquidity could fuel global inflationary pressures. As the money supply increases, the price level is likely to rise with it, posing a threat to global economic stability. In particular, emerging economies, whose financial markets are relatively fragile, are more vulnerable to dollar liquidity shocks and face the risk of capital outflows, asset price declines and even debt crises.

The Fed's 50 basis point rate cut is undoubtedly an attempt to boost the US economy through monetary policy adjustments and avoid falling into recession. However, from the reality of the situation, there are still many uncertainties about whether this move can achieve the desired effect.

First of all, the US dollar interest rate is still at a high level after the rate cut, which means that the financial risk in the United States has not been fundamentally alleviated. History suggests that rate cuts alone are not enough to prevent a recession. Especially in the context of the current US economy facing multiple pressures such as "high inflation, high interest rates, high deficits, and high debt", the role that interest rate cuts can play is more limited.

Second, it is an indisputable fact that the momentum of the US economy is weakening. The coronavirus pandemic has had a profound impact on the US economy, and while fiscal stimulus has provided some relief, its effects are fading. At the same time, persistently high interest rates have had a significant dampening effect on demand, causing consumer spending and broader economic activity to cool. In this context, although interest rate cuts can reduce financing costs to a certain extent, it is difficult to fundamentally change the downward trend of the economy.

Moreover, the high deficit and debt problems are also important factors restricting the long-term growth of the US economy. At present, the scale of the US federal government debt has exceeded the $35 trillion mark, and the high scale of fiscal deficit and debt has become an unbearable burden for the US economy. If this problem is not effectively addressed, the future development of the US economy will face severe challenges.

The Fed's decision to raise and lower interest rates affects the global economy like a tidal wave. During the Fed rate hike, a large amount of capital was attracted to the US market, resulting in a tightening of global liquidity, the depreciation of many currencies, and the increase in debt service pressure. Today's decision to cut interest rates could trigger a new round of capital flows and financial market volatility.

From a more macro level, behind the "dollar tide" phenomenon is the support of the hegemony of the dollar. With the central role of the dollar in the international financial system, economic problems in the United States can often trigger volatility in global financial markets and transfer crises to other countries. This phenomenon not only increases the instability of the global economy, but also increases the tension in international economic relations.

For countries around the world, in the face of the impact of the "dollar tide", it is necessary to adopt more robust monetary policies and fiscal policies to deal with. On the one hand, it is necessary to strengthen the supervision and regulation of domestic financial markets to prevent the impact of large-scale capital flows on financial markets. On the other hand, we should actively promote economic structural adjustment, transformation and upgrading, and enhance the internal growth drivers of the economy in response to changes in the external environment.

In addition, strengthening international cooperation is also an important way to cope with the impact of the "dollar tide". All countries should jointly promote the reform and improvement of the international economic governance system and promote the balanced and sustainable development of the global economy. We should strengthen cooperation in policy coordination, information sharing and risk prevention and control to jointly address the challenges and risks facing the global economy.