Power of FED rate cut: from Wall Street to Global Markets

Since 2022, FED has aggressively raised interest rates to combat inflation after Covid-19. Now, on September 18, 2024 for the first time in two years FED will most likely slash the interest rates. The biggest question for the rate cut is whether this rate cut is by 25 bps or 50 bps.

Whenever the FED changes rate the whole world sees its impact. The main economies of the world are interlinked or you can say they are very much dependent on the US economy. Any change in the US can be reflected in other country’s stock markets.

What happens if the FED cuts the rates?

Whenever the FED cuts the rate it is usually to boost the economic activities in the country. Just after the pandemic FED had cut the rate so much that it was almost zero percent. When the rate cut happens then it is very cheaper to borrow money. When people can borrow money cheaper, then they spend more. As they spend more it increases the economic activities in the country. This increases the supply and demand of goods in the market.

If the interest rates remain lower for a long time then it can lead to higher inflation. That’s why after every few months there is a rate change by the FED according to the ground situation.

In 2024, other country’s central banks such as EUROzone, UK, Canada, Switzerland, Sweden had already cut the rates. FED is the last among them. As of now there is a rate cut expectation of 25 bps but they can also do a 50 bps rate cut.

So, here we have answered all of the impact of FED rate cuts on the different stock markets in the world and its impact on different commodities.

Fed Rate Cut Impact on Markets

How does a Fed rate cut affect the stock market?

When the Fed cuts interest rates, borrowing costs for companies decrease, making it easier and cheaper for businesses to take out loans for expansion, investment, or daily operations. As a result, company profits may increase, and investors tend to buy more stocks, driving up stock prices. However, if the rate cut is due to a weak economy, the stock market may respond cautiously, balancing optimism with concerns about economic health.

What is the impact of a Fed rate cut on gold prices?

Gold prices typically rise when interest rates are cut. This happens because lower interest rates make holding gold more attractive. Gold doesn’t generate income like bonds or savings accounts do, so when rates are low, investors move to gold as a “safe haven” asset. Additionally, a rate cut often weakens the U.S. dollar, which can push gold prices higher since gold is priced in dollars.

How do Fed rate cuts influence crude oil prices?

A rate cut can lead to higher crude oil prices. When the Fed cuts rates, borrowing costs for businesses and consumers decrease, potentially boosting economic activity and increasing the demand for energy, including oil. Additionally, a weaker U.S. dollar following a rate cut can make oil cheaper for countries that use other currencies, raising global demand for crude oil.

What happens to the U.S. dollar when the Fed cuts interest rates?

A Fed rate cut typically weakens the U.S. dollar. Lower interest rates reduce the returns investors can earn from holding U.S. assets like Treasury bonds, leading to less demand for the dollar. As demand for the dollar decreases, its value falls relative to other currencies. This makes U.S. exports more competitive internationally but can increase the cost of imported goods.

How does a Fed rate cut impact bond yields?

When the Fed cuts interest rates, bond yields usually fall. This is because new bonds issued after the rate cut offer lower interest payments to reflect the new, lower rates. Existing bonds with higher interest rates become more valuable, driving up their prices. Investors looking for safer returns may also move into bonds when rates fall, further lowering yields.

Which sectors benefit the most from a Fed rate cut?

Sectors that rely heavily on borrowing, such as real estate, consumer discretionary (e.g., retail), and industrials, tend to benefit from a Fed rate cut. Lower borrowing costs make it cheaper for these businesses to finance projects and operations. Additionally, tech stocks often benefit, as lower rates encourage investment in growth-oriented companies.

How do Fed rate cuts affect housing prices?

Fed rate cuts can boost housing prices because they make mortgages cheaper. When borrowing becomes more affordable, more people can qualify for home loans, increasing demand for homes. This higher demand can drive up home prices. However, if rates are cut too low for too long, it could lead to housing bubbles.

How does a Fed rate cut impact tech stocks?

Tech stocks often benefit from Fed rate cuts because these companies frequently rely on borrowing to fund innovation and expansion. Lower interest rates reduce their financing costs, boosting profitability. Additionally, tech companies, especially startups, are seen as high-growth investments, and lower rates make their future earnings more attractive to investors.

Do Fed rate cuts influence cryptocurrency markets?

Yes, Fed rate cuts can influence cryptocurrency markets. Lower interest rates reduce returns on traditional investments like bonds, pushing some investors toward alternative assets like cryptocurrencies. Additionally, if a rate cut weakens the U.S. dollar, it may lead to more interest in decentralized assets like Bitcoin, which are seen as a hedge against currency devaluation.

What is the relationship between Fed rate cuts and inflation?

Fed rate cuts can potentially lead to higher inflation. When borrowing is cheaper, consumers and businesses spend more, increasing demand for goods and services. If supply doesn’t keep up with this increased demand, prices can rise, leading to inflation. However, the Fed monitors inflation closely and adjusts rates as necessary to prevent it from spiralling out of control.

Fed Rate Cut Impact on Commodities

How does a Fed rate cut affect commodity prices like copper and Aluminum?

A Fed rate cut often pushes commodity prices higher, including industrial metals like copper and Aluminum. This is because a rate cut stimulates economic activity, leading to increased demand for materials used in manufacturing and construction. Additionally, a weaker U.S. dollar after a rate cut can make commodities cheaper for foreign buyers, further boosting demand.

Does the Fed’s monetary policy impact agricultural commodity prices during a rate cut?

Yes, agricultural commodities like wheat, corn, and soybeans can be affected by a Fed rate cut. Lower interest rates can spur economic growth, increasing demand for food products. Moreover, a weaker U.S. dollar following a rate cut makes U.S. agricultural exports cheaper for foreign countries, potentially driving up demand and prices for these commodities.

What is the effect of a Fed rate cut on silver prices?

Silver, like gold, often rises in value after a Fed rate cut. Lower interest rates make non-yielding assets like silver more attractive to investors. Also, silver is widely used in industrial applications, so increased economic activity after a rate cut can drive up demand for the metal.

Why does gold tend to rise after a Fed rate cut?

Gold rises after a Fed rate cut for a couple of reasons. First, lower interest rates make bonds and savings accounts less attractive, pushing investors toward gold, which holds its value. Second, a weaker dollar following a rate cut makes gold cheaper for foreign investors, increasing demand and driving up prices.

How do Fed rate cuts affect natural gas prices?

Fed rate cuts can lead to higher natural gas prices by stimulating economic growth, which increases energy demand. Additionally, a weaker U.S. dollar after a rate cut makes U.S. natural gas cheaper for foreign buyers, boosting exports and pushing up prices.

Fed Rate Cut impact on Economic Sectors

What is the impact of a Fed rate cut on the real estate market?

A Fed rate cut makes borrowing cheaper, reducing mortgage rates. This encourages more people to buy homes, increasing demand and potentially pushing up home prices. Lower interest rates also make refinancing more attractive, allowing existing homeowners to reduce their mortgage payments.

How do rate cuts affect banking sector stocks and profitability?

While lower rates can increase loan demand, they generally hurt banks’ profitability. Banks earn money by lending at higher interest rates than they pay on deposits. When rates are cut, the difference between these two (the “spread”) narrows, reducing profits. However, increased loan demand can partially offset this effect.

How do Fed rate cuts influence consumer spending?

Fed rate cuts make borrowing cheaper, which can lead to increased consumer spending. Lower interest rates reduce the cost of loans for cars, homes, and credit cards, giving consumers more disposable income. This boost in spending can stimulate the economy, but if rates stay too low for too long, it can lead to inflation.

Why do growth stocks rally after Fed rate cuts?

Growth stocks, particularly in sectors like technology, tend to rally after Fed rate cuts because these companies are focused on future earnings. Lower interest rates make it cheaper for them to borrow money to fuel expansion, and future earnings become more attractive when discounted back to the present using lower interest rates.

How does a Fed rate cut affect the auto industry?

A Fed rate cut typically boosts the auto industry by lowering the interest rates on auto loans. When borrowing becomes cheaper, more consumers are encouraged to buy cars. This increased demand can lead to higher sales and profits for automakers, dealerships, and related industries.

Fed Rate Cut impact on Global Markets

How does a U.S. Fed rate cut affect emerging markets?

A Fed rate cut can have a significant impact on emerging markets. It often leads to a weaker U.S. dollar, which benefits emerging market economies by making their exports cheaper. Additionally, lower U.S. rates can lead investors to seek higher returns in emerging markets, driving up their stock and bond prices. However, rapid inflows of capital can also cause volatility.

How do Fed rate cuts impact foreign currencies like the Euro and Yen?

A Fed rate cut typically weakens the U.S. dollar, which can lead to the appreciation of foreign currencies like the Euro and Yen. This makes U.S. goods cheaper for foreign buyers, potentially boosting U.S. exports, while making foreign goods more expensive for U.S. consumers.

What is the global impact of the U.S. Fed rate cuts on international trade?

A Fed rate cut can stimulate global trade by boosting U.S. economic activity and increasing demand for imported goods. It can also weaken the U.S. dollar, making American goods cheaper for foreign buyers. However, stronger foreign currencies may reduce the competitiveness of exports from other countries, potentially leading to trade imbalances.

How do Fed rate cuts influence foreign stock markets?

Fed rate cuts often have a positive effect on foreign stock markets, particularly in countries that trade heavily with the U.S. or rely on U.S. capital flows. A weaker dollar following a rate cut makes U.S. exports cheaper and can increase demand for foreign goods and services, benefiting global companies.

Does a Fed rate cut affect global inflation rates?

Yes, a Fed rate cut can influence global inflation. By boosting U.S. economic activity, it can increase demand for global goods and services, potentially pushing up prices internationally.

Additionally, a weaker dollar can raise the cost of imported goods for other countries, contributing to inflation abroad.

What is the impact of a Fed rate cut on the Indian stock market?

A Fed rate cut generally benefits the Indian stock market. Lower U.S. interest rates make Indian assets more attractive to foreign investors, leading to increased capital inflows. Additionally, a weaker U.S. dollar can benefit India by making its exports more competitive, boosting corporate earnings and stock prices.

How do Fed rate cuts influence the Indian rupee?

Fed rate cuts typically weaken the U.S. dollar, which can strengthen the Indian rupee. A stronger rupee can make imports cheaper for India, reducing inflationary pressures. However, a stronger rupee may also hurt India’s export competitiveness, as Indian goods become more expensive for foreign buyers.

What effect does a Fed rate cut have on Japan’s economy and markets?

A Fed rate cut can lead to a stronger Japanese yen as the U.S. dollar weakens. This can hurt Japan’s export-driven economy by making Japanese goods more expensive abroad. However, the lower U.S. rates can also push investors into Japanese stocks and bonds, potentially boosting financial markets.

How does a Fed rate cut affect the Japanese yen?

A Fed rate cut typically weakens the U.S. dollar, causing the Japanese yen to strengthen. A stronger yen makes Japanese exports more expensive and can slow down Japan’s export-driven economy. However, a strong yen can make imports cheaper, potentially lowering inflation.

How does a Fed rate cut impact the European stock market?

A Fed rate cut can positively affect the European stock market. A weaker U.S. dollar makes European exports more competitive, benefiting companies that sell goods and services abroad. Additionally, lower U.S. interest rates may push global investors to seek higher returns in European stocks and bonds.

What effect does a Fed rate cut have on the Eurozone economy?

A Fed rate cut can boost the Eurozone economy by weakening the U.S. dollar and making European exports more competitive. However, a stronger Euro may reduce the competitiveness of Eurozone exports, and the overall impact depends on the specific economic conditions in Europe at the time.

How do Fed rate cuts influence the Chinese economy and financial markets?

Fed rate cuts can benefit China by weakening the U.S. dollar, making Chinese exports more competitive in global markets. Additionally, lower U.S. interest rates may lead to increased investment in Chinese assets, boosting the Chinese stock market. However, if the rate cut signals economic weakness in the U.S., it could negatively affect demand for Chinese goods.

What is the effect of the U.S. Fed rate cut on the Brazilian economy?

A Fed rate cut can strengthen the Brazilian economy by weakening the U.S. dollar, making Brazilian exports like commodities more competitive. Additionally, lower U.S. rates can lead to increased capital inflows into Brazil, boosting stock prices and economic activity. However, Brazil’s dependence on commodity exports means global demand fluctuations also play a role.

How do Fed rate cuts affect the UK’s economy and pound sterling?

Fed rate cuts generally weaken the U.S. dollar, which can strengthen the British pound. A stronger pound can hurt the UK’s export competitiveness but make imports cheaper, reducing inflation. Additionally, lower U.S. rates can push investors to seek returns in the UK market, boosting stock prices.

What impact does a Fed rate cut have on the Australian economy and dollar?

A Fed rate cut can strengthen the Australian dollar by weakening the U.S. dollar. A stronger Australian dollar can hurt the country’s export competitiveness, but lower global interest rates may boost demand for Australia’s commodities, which could benefit the economy.

Fed Rate Cut impact on your Personal Finance

How do Fed rate cuts affect mortgage rates?

Fed rate cuts generally lead to lower mortgage rates. When the Fed cuts its rate, it lowers the cost of borrowing for banks, which in turn pass those savings on to consumers through lower mortgage rates. This makes buying a home more affordable, potentially increasing demand in the housing market.

What is the impact of a Fed rate cut on credit card interest rates?

A Fed rate cut can lower credit card interest rates, but the impact is usually less direct than with other loans. Most credit card rates are tied to the prime rate, which moves based on the Fed’s rate. When the Fed cuts rates, the prime rate usually decreases, leading to lower interest on variable-rate credit cards.

How do Fed rate cuts affect personal savings account returns?

When the Fed cuts rates, the interest rates on personal savings accounts usually fall. Banks pay lower interest to savers because they earn less from loans. While this means consumers may earn less from savings accounts, it can also encourage spending or investing, as the returns from savings diminish.

How does a Fed rate cut influence student loan interest rates?

Fed rate cuts can lower interest rates on variable-rate student loans, making monthly payments more affordable. However, fixed-rate student loans are not immediately affected by a rate cut. Students with variable-rate loans benefit the most, as their rates adjust downward in line with the Fed’s cuts.

What happens to car loan rates when the Fed cuts interest rates?

A Fed rate cut typically lowers car loan rates. When borrowing becomes cheaper, consumers are more likely to take out loans to buy cars, which can boost car sales. Lower car loan rates make monthly payments more affordable, making it easier for people to finance new or used vehicles.

Conclusion

So overall FED rate change has impact in every sector of economy in the world. Whether these changes are good or bad you can predict it immediately from how stock market around the world react to this change.

Whether the rate change is positive or negative, your job is to act according to the market situation and make profit for yourself. This is exactly what we provide in our newsletters, so subscribe to our newsletter to learn more about money and better investment opportunities.

If you found this article helpful then check out other articles on our website and also consider checking our YouTube channel to learn more about money.