The US central bank – Federal Reserve (Fed) recently held interest rates steady, while also indicating it still expects one more hike before the end of the year and fewer cuts than previously indicated next year.
That final increase, if realised by the year-end, would do it for this cycle, according to projections the central bank released at the end of its two-day meeting on September 20. If the Fed goes ahead with the move, it would make a full dozen hikes since the policy tightening began in March 2022.
Along with the rate projections, the Fed also sharply revised up its economic growth expectations for this year, with gross domestic product now expected to rise 2.1% this year.
In addition to holding rates at relatively high levels, the Fed is continuing to reduce its bond holdings, a process that has cut the central bank balance sheet by some $815bn since June 2022.
Since the United State is the world’s largest economy, every economic move that the US makes has immediate effects on the global markets. In 2022, when the US Fed Reserve began raising interest rates, there were global concerns about ripple effects throughout the rest of the world.
At a basic level, raising interest rates go hand-in-hand with appreciating currencies. And in many parts of the world, the US dollar is used as a benchmark of current and future economic growth. In developed countries, a strong dollar is seen in a positive light. But circumstances are different in emerging economies.
Undoubtedly, the US dollar is the global reserve currency. So, when the Fed adjusts interest rates, it affects the attractiveness of holding US dollars.
Therefore, a rate hold will stabilise the value of the dollar in international markets, which in turn influence exchange rates and capital flows around the world.
Analysts say changes in US interest rates influence the flow of capital in and out of different countries. Consequently, the hold on interest rates make US investments relatively more attractive compared to those in other countries. This might lead to increased foreign investment in the US, which can stimulate economic activity.
Many commodities, such as oil and gold, are priced in US dollars. A stable interest rate environment, therefore, helps keep commodity prices more predictable for global markets.
Countries with large amounts of debt in US dollars are particularly sensitive to changes in US interest rates. If the US were to raise rates, it could make it more expensive for these countries to service their debt, potentially leading to financial instability.
The interest rate set by the Fed indirectly influences interest rates around the world. A hold in US rates is expected to contribute to global stability in borrowing costs.
Changes in interest rates affect consumer spending and business investment. If the Fed holds rates steady, it helps maintain stability in the US economy, which is one of the largest consumer markets in the world.
This stability positively impacts world’s trade since a stable interest rate environment contributes to a sense of predictability and stability in the global economy.
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