After 11 consecutive rate hikes over the past two years, the US Federal Reserve announced a sharp rate cut in September, marking a shift in monetary policy. In the short term, the increase in US dollar liquidity brought about by the Fed's rate cut may have certain positive effects, but in the medium and long term, this is the beginning of a new round of monetary policy cycle from easing to tightening.

Whether it is the tide or the tide, the United States has not changed its mentality of playing with monetary policy and harvesting the world's wealth; the means of first releasing water and then closing the net, and then releasing water again after closing the net, have not changed. The tide and the tide are nothing more than the decomposition of the financial hegemony of "hand up", "knife down", "hand up again", "knife down again".

On September 18, U.S. Federal Reserve Chairman Powell attended a press conference in Washington. The Federal Reserve announced on the 18th that it would lower the target range of the federal funds rate by 50 basis points to a level between 4.75% and 5.00%. Photo by Xinhua News Agency reporter Hu Yousong

Concerns about slowing economic growth grow

Since July last year, the U.S. federal funds rate has been at its highest level in 23 years. On September 18, the Federal Reserve announced a rate cut of 50 basis points instead of 25 basis points, which on the one hand reflects confidence in the downward trend of inflation, and on the other hand highlights concerns about the weak job market.

The Australian Financial Review website published an article saying that the scale of this rate cut is very rare. The Fed's previous rate cuts of 50 basis points were related to emergency moments such as responding to the bursting of the Internet bubble in January 2001 and the subprime mortgage crisis in September 2007.

Stefan Gerlach, chief economist at EFG Bank in Zurich, Switzerland, said the Federal Reserve's sharp interest rate cut will affect the interest rate decisions of other central banks and lead the market to conclude that the U.S. economy is slowing down.

After the interest rate cut channel was opened, the Federal Reserve still faces the challenge of balancing the trend of improving inflation and the risk of economic downturn. According to the data of the U.S. Department of Labor, the U.S. Consumer Price Index (CPI) rose by 2.4% year-on-year in September this year, higher than market expectations. At the same time, in the week ending October 5, the number of first-time applications for unemployment benefits in the United States rose to the highest level in more than a year.

The unexpected rebound in inflation and the weak labor market have further exacerbated the uncertainty of the Fed's interest rate cut prospects and led to continued volatility in the U.S. Treasury market. Fortress Securities Investment Company warned that investors should be prepared for "significant volatility" in the U.S. Treasury market.

Bank of Japan Governor Kazuo Ueda said that there are downside risks to the U.S. economy and that "uncertainty about the prospects of overseas economies, represented by the United States, has led to recent instability in financial and capital markets."

This is a picture of US dollar banknotes taken in Washington, the United States on March 23, 2020. Photo by Xinhua News Agency reporter Liu Jie

Monetary policy has many negative spillover effects

In theory, the Fed's rate cut will deliver more liquidity to the market and reduce the cost of US dollar financing. For the global economy, although the rate cut has a short-term positive effect, the flow trend of US dollar capital will also have negative spillover effects on multiple levels such as financial markets and international trade.

After the Fed cuts interest rates, US dollar funds will look for investment destinations around the world, and the rapid inflow and outflow of hot money may impact the international capital market and asset prices. Murat Tufan, an analyst at the Turkish Economic Channel, said that the Fed's interest rate cut will increase regional market volatility and investment risks while increasing US dollar liquidity.

At the trade level, the exchange rate of the US dollar against other major currencies may fluctuate greatly, and many economies face the risk of trade imbalance due to the appreciation of their currencies. Marcelo Estevan, chief economist of the Institute of International Finance, said that the interest rate differential between the euro and the US dollar may bring risks such as euro appreciation and export decline to Europe. Slovenia's Daily analyzed that the Fed's interest rate cut may lead to a stronger euro and weaken the competitiveness of European exports.

Kenyan economist James Shikwati believes that interest rate cuts may lead to instability in the Kenyan shilling exchange rate, and the appreciation of the shilling will cause difficulties for exporters.

In addition, increased dollar liquidity usually means an increase in money supply, which may lead to rising inflationary pressures around the world, including in the U.S. Germany's Handelsblatt commented that the Fed's sharp interest rate cuts have eased financing conditions for businesses and consumers, but uncertainty remains and inflation risks will increase.

It is worth noting that the downward cycle of US dollar interest rates is often a period of rapid credit expansion in emerging market economies. Due to the reduction in interest rate costs, some economies may over-borrow, increasing the risk of debt default in the future. Historical experience shows that sovereign debt defaults in many emerging countries were triggered by the Federal Reserve's monetary policy shift.

The Latin American Post published an article saying that countries such as Mexico, Brazil and Argentina are already facing challenges such as high inflation and political instability, and the Federal Reserve's policies may exacerbate the financial vulnerabilities of these countries.

　　This is the Federal Reserve building photographed in Washington, the United States on June 22, 2022. Photo by Xinhua News Agency reporter Liu Jie

The hegemony of the US dollar impacts the stability of the world economy

The US monetary policy is bound by vote politics and dominated by "America First". The dollar tide formed by the Fed's rounds of interest rate cuts and hikes has plunged the world economy into a cycle of "prosperity-crisis-down". The dollar hegemony behind this has become an important destabilizing factor threatening the world economy.

Historically, many financial crises have been linked to the U.S. monetary policy cycle. For example, from 2001 to 2003, the Federal Reserve cut interest rates 13 times in a row, amplifying asset bubbles. From 2004 to 2006, the Federal Reserve raised interest rates 17 times in a row, directly bursting the real estate bubble, triggering the subprime mortgage crisis, and eventually evolving into an international financial crisis.

Before this rate cut, in response to the impact of the COVID-19 pandemic, the Federal Reserve introduced an unconventional monetary policy of "zero interest rate + quantitative easing" in March 2020. Then, in response to high inflation, the Federal Reserve started an aggressive rate hike mode, with a cumulative rate hike of 525 basis points from March 2022 to July 2023.

Luis Delgarro, director of academic research at the Venezuelan Center for Advanced Studies on the Development of Emerging Economies, said that Latin American countries are extremely vulnerable to the monetary policy of the United States. In the past two years, the United States has taken a number of measures to deal with inflation, which has transmitted pressure to Latin American countries and dampened their economic performance.

　　This is the U.S. Treasury Building on a dollar bill photographed in Washington, the capital of the United States, on April 29, 2020. Photo by Xinhua News Agency reporter Liu Jie

Relying on the hegemony of the US dollar, the United States has also forged a "credit card" for itself with unlimited overdrafts. In the just-concluded fiscal year 2024, the US federal government budget deficit reached 1.8 trillion US dollars. The Fed's interest rate cut will increase its appetite for issuing more treasury bonds, and the US debt crisis may intensify and affect the world.

Germany's Frankfurter Allgemeine Zeitung commented that the US budget deficit is expected to reach 6% of its GDP this year. The policies promised by the presidential candidates of both parties will also significantly increase the budget deficit. The Federal Reserve did not prepare for this, but instead cut interest rates sharply, sending the opposite signal.

Azamat Seitov, an expert at the Institute of Advanced International Studies at the University of World Economy and Diplomacy of Uzbekistan, said that the US is about to have a general election, and the Biden administration may hope to increase the support rate of the Democratic Party through short-term economic stimulus. The US does not consider the global impact of its monetary policy and allows negative effects to spill over.

The abuse of the US dollar hegemony is having a backlash effect. According to data from the International Monetary Fund, at the end of the second quarter of this year, the US dollar accounted for 58.2% of global official foreign exchange reserves, the lowest since 1995. It is foreseeable that this downward trend is far from over.