Will a Fed Rate Cut Be on the Horizon? 5 Implications for Global Markets

Investors Anticipate Key Federal Reserve Meeting

Investors are eagerly awaiting the much-anticipated Federal Reserve meeting scheduled for Wednesday, September 18th.
This gathering is particularly significant as it is anticipated that the central bank will cut interest rates for the first time since 2020.

The week in financial markets has kicked off surrounded by this expectation, with the Fed’s decision regarded as pivotal.
Many investors hope that this move could lower borrowing costs for businesses and subsequently enhance overall profit growth, thus boosting economic expansion.

The decision to finally reduce the cost of money in the U.S.
is expected to have far-reaching consequences on global markets, impacting stock prices, bond yields, and the dollar.
This influence on international stock exchanges and currency dynamics explains why all eyes are on Powell: what impact will the Fed meeting have on world finance?

5 Key Impacts of a Fed Rate Cut

The implications of a potential 25 basis point rate cut by the Federal Reserve will be substantial according to experts and will affect at least five key aspects of global markets.

The scale of the initial move and the overall extent of easing are still under debate, while the upcoming elections in the United States add another layer of complexity for global investors and rate policymakers seeking guidance from the Fed, hoping for a soft landing of the economy.
Nevertheless, even if uncertainties surrounding the global financial and economic landscape are not entirely resolved by the September 18 meeting, the impacts of the first Fed rate cut are projected to include:

1.
Bond Yields

Confidence in the Fed’s initiation of cuts is a positive factor for bond markets worldwide, which tend to move in tandem with Treasury securities.
As highlighted by Reuters’ analysis, yields on U.S., German, and U.K.
government bonds are all expected to record their first quarterly decline since late 2023, coinciding with anticipated Fed actions.

2.
Emerging Markets

Lower U.S.
interest rates could provide emerging market central banks with more room to maneuver, alleviating pressure and supporting domestic growth.
Approximately half of the 18 emerging markets tracked by Reuters have already begun cutting rates, anticipating the Fed’s move, especially in Latin America and Eastern Europe.

3.
The Dollar

The Fed’s rate-cutting strategy should weaken the dollar, offering further relief to emerging markets heavily reliant on the greenback.
However, economies hoping for U.S.
interest rate cuts to stem dollar appreciation might be disappointed, as observed by JPMorgan, which noted dollar strength following initial Fed cuts in three of the past four cycles.

4.
Stock Markets

A global stock rally, recently shaken by growth concerns, could regain momentum if lower U.S.
interest rates stimulate economic activity and prevent recession.
“If a cut occurs without a recession, typically markets tend to rise,” stated Emmanuel Cau, head of European equity strategy at Barclays.

5.
Commodities

Regarding commodities, precious and base metals such as copper are expected to benefit from Fed rate cuts.
Lower rates and a weaker dollar could fuel momentum, while gold, often negatively correlated with yields, typically outperforms during rate cuts.
However, investors should remain cautious as advised by John Reade of the World Gold Council.