FED’s Rate Cuts: When will it be and how does it impact other countries?
Author: Song Hyoseung (Aaron), Research Executive
Editor: Tavisha Jain, Research Director
Struggling Economies and their Strategies
Since the outbreak of global pandemic, many countries experienced high inflation rates due to the disruption of supply chain and rising costs. Even though central banks have increased interest rates to reduce inflation, global conflicts like the Russo-Ukrainian War and market’s reluctance hindered their efforts.
Despite these hardships, many economists agreed that 2023 was the year where many countries experienced a decrease in year-on-year inflation. While many economies are expected to rebound, countries like China and Australia are experiencing slow economic growth in 2024 due to systematic problems.
To revitalize their economy, each leader implements different economic strategies. For example, China is preparing for a "second China shock" to revitalize the domestic economy by mass-producing high value-added products such as electric vehicles, batteries, and home appliances. Similarly, Australia is aiming at lowering mortgage and tax payment rates to boost consumer spending. They both prioritize domestic markets to revitalize the economy, especially on the consumer's side, which needs more stimulus.
FED’s pivot
On March 1, the US personal core expenditure (PCE) index for January 2024 eased to 2.4%, compared to the PCE index for December 2023 of 2.6%. This resulted in economists and the financial sector expecting the Fed to make rate cuts as early as June. Moreover, on March 8, Tom Orlik, global chief economist at Bloomberg Economics, predicted that the FED will cut rates from June by 0.25%.
In 2024, the FED will cut rates, but when will it be? It will solely depend on the upcoming monthly inflation indexes as Jerome Powell, the chair of the FED, told the House Financial Services Committee that rate cuts will begin “at some point this year” if there is “a bit more” evidence to move toward their 2% inflation objective.
Expectations
Even though the financial sector and the FED strongly want to cut interest rates, there has been no convincing evidence for the FED to take such action. Expectations of a global pivot in June have been shifted to late July to September as February Consumer Price Index (CPI) was released on 12 March; it marked 3.2%, compared to January CPI of 3.1%. Despite the circumstances, on 21 March 2024, Swiss National Bank (SNB) was the first country that decreased standard interest rates from 1.75% to 1.50%, a 0.25% decrease, remarking the beginning of a global pivot. Therefore, the slowdown in upcoming inflation indicators and US economic situation in 2024 will impact the timing of rate cuts.
Impact on China and Australia
The reason why Fed’s decision draws so many people’s decision is the economic interdependence between countries. It would also have several impacts on struggling economies like China and Australia. For example, Fed’s rate cuts would allow China to lower borrowing costs to stimulate domestic investment and consumption. Moreover, lower interest rates in the US would lead to capital inflow to China with appreciation of Yuan relative to U.S. dollar. Similarly, Fed’s rate cuts would stimulate the Australian economy, the major exporter of commodities like iron and natural gas, by boosting commodity prices. Still, economists from China and Australia commented that these countries would need to “reinvent itself” with economic policies to boost domestic consumption and productivity, apart from the impact of Fed’s rate cuts on them (Reuters, 2024; Leggatt, 2024).
Further readings:
"Inflation is Down. Unemployment is Low. Is this a soft Landing?" - Wall Street Journal Podcast https://open.spotify.com/episode/3w4YyLOJKp6XVhFnPugU3v?si=V7aouVyMTSy_i-SuJl7Qag
What Is The Federal Funds Rate? – Forbes Advisor https://www.forbes.com/advisor/investing/federal-funds-rate/#:~:text=The%20federal%20funds%20rate%20is,money%20in%20the%20U.S.%20economy.
References
Bloomberg. (2024, January 8). Fed pivot will dominate year of rate cuts in turn of global cycle. The Economic Times. https://economictimes.indiatimes.com/news/international/world-news/fed-pivot-will-dominate-year-of-rate-cuts-in-turn-of-global-cycle/articleshow/106621027.cms?from=mdr
Butts, D. (2024, March 25). China Faces “Fork in the road,” IMF chief says, urging Beijing to embark on pro-market reforms. CNBC. https://www.cnbc.com/2024/03/25/china-faces-fork-in-the-road-imf-chief-georgieva-says-cdf-forum.html
Jones, C., & Duguid, K. (2024, March 1). US inflation eases to 2.4%, according to Federal Reserve’s target index. Financial Times. https://www.ft.com/content/e9a3dd8f-574a-45fb-b60f-12fd1ac5cd93
Reuters. (2024, March 15). China cbank set to leave key rate unchanged on Friday amid ... REUTERS. https://www.reuters.com/markets/rates-bonds/china-cbank-set-leave-key-rate-unchanged-friday-amid-uncertainty-around-fed-2024-03-14/
Revill, J. (2024, March 21). Swiss central bank cuts rates in surprise move, getting ahead of ... REUTERS. https://www.reuters.com/markets/rates-bonds/swiss-national-bank-surprises-with-interest-rate-cut-2024-03-21/
The Business Times. (2024, March 6). Australian dollar struggles as economy comes to a standstill. The Business Times. https://www.businesstimes.com.sg/companies-markets/capital-markets-currencies/australian-dollar-struggles-economy-comes-standstill
The Strait Times. (2024, March 5). Why China’s Xi Jinping is pushing “high-quality development.” The Straits Times. https://www.straitstimes.com/asia/east-asia/why-china-s-xi-is-pushing-high-quality-development