Why rate cuts by the U.S. Federal Reserve matter to world markets

Global markets await Federal Reserve interest rate cut, impacting currencies, bonds, equities, and commodities worldwide.

When the Federal Reserve delivers a widely-anticipated interest rate cut on Wednesday (September 18, 2024), its first in four years, the move will resonate well beyond the United States.

The size of a first move and the scale of overall easing remains open to debate, while a looming U.S. election is another complicating factor for global investors and ratesetters looking for a steer from the Fed and pinning hopes on an economic soft landing.

“We don’t know yet what kind of cycle this is going to be—will it be like 1995 when there was just 75 bps of cuts or 2007-2008, when there was 500 bps,” said Kenneth Broux, head of corporate research, FX and Rates at Societe Generale.

Here’s a look at what is in focus for world markets:

In spring, as U.S. inflation proved stickier than expected, investors questioned how far others such as the European Central Bank or the Bank of Canada could cut rates if the Fed stayed on hold this year before their currencies weakened too far, adding to price pressures.

U.S. cuts finally starting comforts regions facing weaker economies. Traders added to bets for rate reductions by other central banks as Fed rate-cut expectations grew recently.

Yet they price fewer cuts in Europe than for the Fed, with the ECB and Bank of England sounding more vigilant around inflation.