how will the "dollar tide" of interest rate cuts, which resumed after a lapse of 4 years, affect the global economy?
2024-09-20
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the u.s. federal reserve ended its two-day monetary policy meeting on the 18th and announced that it would lower the target range of the federal funds rate by 50 basis points to between 4.75% and 5%. this is the first interest rate cut by the federal reserve since march 2020, and it was an extraordinary and large interest rate cut at the beginning, marking the shift of monetary policy from a tightening cycle to an easing cycle since the launch of restrictive monetary policy in march 2022, showing concerns about slowing economic growth.
as the global economic recovery is still under pressure, what does the increase in us dollar liquidity brought about by the sharp interest rate cut mean for the global economy? can the interest rate cut effectively resolve the risk of us economic recession? what impact will the "dollar tide" formed by the fed's interest rate hikes and cuts have on the global economy?
on september 18, u.s. federal reserve chairman powell attended a press conference in washington. photo by xinhua news agency reporter hu yousong
what does increased us dollar liquidity mean?
as the world's main reserve currency, the us dollar has long dominated the international financial system, and most countries in the world use the us dollar to settle transactions in commodities such as oil and raw materials. many developing countries can only rely on the us dollar as a tool for foreign exchange reserves and external payments due to unstable local currencies or lack of trust in the international market.
in this context, the supply and demand of the us dollar is closely related to global capital flows. when the us dollar flows into a country or region, it is often accompanied by a large amount of capital and investment, driving economic prosperity. when the tide of the us dollar recedes, capital outflows, asset prices fall, and debt crises often follow.
on the surface, the increase in us dollar liquidity after the fed’s interest rate cut is good for the world economy in the short term, but in the medium and long term it may bring about financial market fluctuations, increased inflation, and debt risks in emerging economies.
after the fed cuts interest rates, capital tends to flow faster in search of higher returns. the rapid inflow and outflow of capital around the world will increase market price volatility and investment risks. at the same time, the interest rate cut will also reduce the relative attractiveness of us dollar assets, leading to large fluctuations in the exchange rate of the us dollar against other major currencies.
on june 27, pedestrians walked past an electronic screen showing real-time exchange rates in tokyo, japan. photo by xinhua news agency reporter zhang xiaoyu
taking the japanese yen as an example, data from the u.s. commodity futures trading commission showed that as of september 10, market bullish sentiment on the yen rose to its highest level since march 2021. some analysts believe that if the fed continues to cut interest rates, the yen may strengthen further, which will put pressure on japanese companies that rely on exports.
in addition, increased dollar liquidity usually means an increase in money supply, which may lead to rising inflationary pressures around the world, including in the united states. at the same time, global trade costs will also be affected. when the dollar weakens, the prices of dollar-denominated commodities in global trade rise, putting pressure on importing countries.
it is worth noting that although the federal reserve’s monetary policy will have an important impact on the world economy, in the era of economic globalization, the u.s. economy itself will also be affected by the global economy.
a recent report released by goldman sachs pointed out that historical data shows that the performance of the us dollar during the fed's interest rate cut cycle is not static, but will be affected by the policies and economic conditions of other major economies in the world. goldman sachs divided the interest rate cut cycles from 1995 to 2020 into two categories: "coordinated" and "uncoordinated", and found that coordinated interest rate cut cycles are usually beneficial to the us dollar, while uncoordinated interest rate cut cycles are usually detrimental to the us dollar.
can interest rate cuts mitigate the risk of a u.s. recession?
the fed's decision to cut interest rates by 50 basis points surprised some market participants, and the market has mixed opinions on whether this rate cut can boost the us economy and avoid a "hard landing". analysts believe that it is not easy to effectively resolve the structural cycle of "high inflation, high interest rates, high deficits and high debts" in the us economy in the short term.
currently, the us dollar interest rate is still at a relatively high level after the rate cut, and the us financial risks have not been eliminated. the us principal fund management company released a report saying that historical data showed that the federal reserve's monetary policy failed to prevent the economic recession during the rate cut cycles in 2001 and 2007. rate cuts are not a panacea, especially in a period when the economy is already facing structural problems.
this is the u.s. treasury building photographed in washington, the capital of the united states, on july 29. photo by xinhua news agency reporter hu yousong
market analysts believe that from a macro perspective, the momentum of the us economy is weakening. after the covid-19 pandemic, the effect of us fiscal stimulus has gradually faded, and the continued high interest rates have had a significant inhibitory effect on demand. judging from economic data, although inflation has fallen, economic downside risks, including a weak labor market, have gradually emerged. consumer spending and broader economic activities have cooled, especially in the real estate market.
in addition, it is difficult for the federal reserve to resolve the long-term risks to us economic growth caused by high deficits and debts in the short term. at present, the scale of us federal government debt has exceeded 35 trillion us dollars, and the fiscal deficit and debt scale are so high that the us economy is overwhelmed. the peter peterson foundation believes that the us fiscal situation is on an unsustainable track. if it is not resolved, the structural mismatch between federal government spending and revenue, as well as the rise in interest rates and borrowing costs, will pose challenges to the federal budget, the us economy and future development.
bloomberg analysis believes that the road ahead remains very uncertain for policymakers and the u.s. economy. many investors and some economists worry that the fed acted too late, causing the labor market and economic growth to be on thin ice and exacerbating financial market volatility.
how the “dollar tide” affects the global economy
normally, the fed will judge whether the current economy is overheating or cooling down based on core economic indicators such as current inflation levels, employment data, labor force participation rate, gdp, financial market operations, and consumer confidence index, and decide whether to raise or lower interest rates accordingly. the fed plays a vital role in the global "dollar tide".
this is the euro logo photographed in frankfurt, germany on january 18. photo by xinhua news agency reporter zhang fan
before this rate cut, in response to the impact of the epidemic, the federal reserve first used the unconventional monetary policy tool combination of "zero interest rate + quantitative easing" in march 2020 to return the united states to the zero interest rate era since the 2008 financial crisis. in this process, most of the over-issued us dollars were exported through importing goods and investing in other countries, helping the united states reap global wealth.
since then, in response to the record high global inflation caused by "large-scale money printing" and "unlimited" quantitative easing, the federal reserve has started an aggressive interest rate hike mode, raising interest rates 11 times from march 2022 to july 2023, with a cumulative increase of 525 basis points. the federal reserve has kept interest rates high, and in recent years, the geopolitical situation in many parts of the world has continued to be tense, capital has flowed to the united states in large quantities, global liquidity has tightened rapidly, many currencies have depreciated sharply, and countries that borrow in us dollars have faced a sharp increase in debt repayment pressure.
under the conditions of economic globalization and capital market opening, the "dollar tide" formed by the fed's repeated interest rate hikes and cuts has plunged the world economy into a cycle of "prosperity-crisis-depression". behind this, it is the dollar hegemony that supports the "capricious" us monetary policy.
with the hegemony of the us dollar, whether through monetary policy, debt markets, or global commodity pricing and the spread of financial crises, us economic problems often trigger fluctuations in global financial markets and pass on crises to other countries. more than half a century ago, former french president charles de gaulle once vividly pointed out that "the united states enjoys the super privileges created by the dollar and the deficit without tears, and uses worthless waste paper to plunder the resources and factories of other nations."
