Fed rate cut could boost global economic recovery

Tuesday's congressional testimony by Federal Reserve Chairman Jerome Powell is an important event to watch. Powell faced pressure and challenges from lawmakers on multiple fronts to explain and defend interest rate cuts, capital requirements for Wall Street banks and other issues. At the same time, the market closely analyzed the contents of her testimony for more clues about the direction of the Fed's monetary policy.

Given the current economic environment and market expectations, lawmakers have put pressure on Powell to cut interest rates. This is because the market widely believes that rate cuts can stimulate economic growth and ease financial market nervousness. Over the past few months, the dynamics of financial markets and the Fed have changed in terms of the pace and timing of expected rate cuts. Markets have had to adjust their view from a highly accommodative Fed to a more cautious and deliberate central bank. But in recent weeks, with changes in inflation data and uncertainty about global growth, the market has renewed expectations for a rate cut.

Powell's testimony drew wide attention in the market. Although he did not give an exact timetable for rate cuts, the market widely interpreted that the Fed is gradually approaching the decision point of rate cuts. At that time, the Fed's interest rate cut is expected to stimulate consumption and investment, boost the stock market, ease credit pressure, enhance the depreciation of the US dollar and export competitiveness, and promote policy coordination and global cooperation to promote the global economic recovery. Against the backdrop of challenges facing the global economy, such monetary policy adjustment is of positive significance and may promote global economic recovery.

Boost consumption and investment: Interest rate cuts typically lower borrowing costs, making it easier for businesses and consumers to get credit. That could spur economic activity as businesses can more easily invest and expand their operations, while consumers can more easily buy goods and services. This increase in consumption and investment helps drive global economic growth.

Boost STOCKS: Interest rate cuts typically cause stocks to rally as investors become more optimistic about the economic outlook. A rise in the stock market could further boost economic activity, as businesses can raise money more easily and consumers can benefit from investing in stocks, leading to more spending. Easing credit pressures, interest rate cuts help ease credit pressures, especially for those companies and sectors that rely on external financing. In a slowing economy, these companies and sectors are likely to face greater financial pressure. By lowering borrowing costs, rate cuts can help stabilize the global economy by providing them with greater financial flexibility.

Increased export competitiveness: Interest rate cuts may lead to a decline in the value of the US dollar, as foreign investors may believe that the value of the US dollar is declining. That could make U.S. exports more competitive while raising the cost of imports for other countries. For other countries, this could lead to improved terms of trade and increased exports, contributing to a global economic recovery.

Policy coordination and global cooperation: In today's highly interdependent global economy, policy coordination and cooperation among central banks is particularly important. The Fed's decision to cut interest rates may trigger monetary policy adjustments in other countries to jointly address global economic challenges. Such policy coordination will help stabilize global financial markets and create favorable conditions for economic recovery.

Increased investment opportunities: The depreciation of the U.S. dollar can increase the price of commodities denominated in the U.S. dollar, such as gold, crude oil, etc., providing investors with the opportunity to earn higher yields in these markets. At the same time, a weaker dollar could make those dollar-denominated assets, such as U.S. stocks and bonds, more attractive to foreign investors because they can now buy them with less of their own currency.

Strengthening of capital flows: The Fed's rate cut could cause capital to flow to other markets, such as emerging markets and developing countries, in search of higher returns. Economic growth and investment opportunities in these markets may increase as a result. However, sudden changes in capital flows can also shock these markets, especially in countries with relatively fragile financial systems and limited policy capacity to respond.

Looking at the specific data and information, the expectation of the Fed's rate cut in 2024 has had a positive impact on the global economy. For example, data released by the China Federation of Logistics and Purchasing show that although the global economy is showing a weakening recovery momentum, the Federal Reserve's interest rate cut expectations have enhanced the resilience of the global economy. In addition, the World Bank report also noted that the U.S. economy performed better than expected, prompting it to slightly raise its forecast for global economic growth in 2024.