ASSESSMENTS

Tracking the Global Ripples of the Fed's Rate Cut

Aug 2, 2019 | 09:00 GMT

This image shows Jerome Powell, chairman of the U.S. Federal Reserve, delivering news about the central bank's decision to cut its benchmark interest rate.

At a news conference on July 31, 2019, U.S. Federal Reserve Chairman Jerome Powell explains the reasoning behind the central bank's decision to lower interest rates for the first time since the 2008 global financial crisis.

(LIU JIE/Xinhua via Getty Images)

Highlights

  • Although the Federal Reserve's rate cut may be premature given the overall economic conditions in the United States, gloomy global economic indicators will continue to push the U.S. central bank toward easing in the short-term.
  • Sluggish global growth, concerns over trade wars and President Donald Trump's demands will increase pressure on the Fed to make further cuts over the next year.
  • The Fed’s moves will reverberate globally, driving other central banks to match it step by step. Some of them will be forced into further easing by weak economic conditions but a currency war will not result.
  • Trump may express his criticism over currency manipulation concerns, but the White House will likely continue to refrain from unilateral intervention to weaken the dollar. Instead, the administration will focus on possible currency manipulation investigations as a part of U.S. trade policy.

The last time the U.S. Federal Reserve cut interest rates, the global financial crisis was in its early stages, Beyonce’s "Single Ladies" topped the Billboard 100 list and George W. Bush still occupied the Oval Office. On July 31, more than a decade after that last loosening of monetary policy, the Fed announced a cut of 25 basis points in the federal funds rate. The decision was driven by several factors, including an increasingly dim outlook for global economic growth, further signs that U.S. inflation is softening and, of course, relentless pressure on the central bank by U.S. President Donald Trump to deliver a rate cut. The Fed’s decision will cascade across the world as other central banks feel pressure to match its moves in dealing with their own slowing economies. However, fears of a global currency war set off by a series of rate cuts are overblown. Nevertheless, Trump’s concerns...

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