With the US economy slowing, a growing number of financial analysts expect the Federal Reserve (Fed ) to announce an interest rate cut at its policy meeting on December 9-10. Investors generally believe that current monetary policy is no longer effective in addressing the current economic environment, especially given the slowing economic growth and easing inflationary pressures, leading to a growing demand for further easing. The Fed's rate cut decision next week will not only impact the US economy but may also influence the global economic landscape. This article is a translation of an analysis report from Investing.com and is for market observation purposes only, not investment advice.
With economic growth slowing, a shift in monetary policy is inevitable.
Weakening economic growth indicators have exacerbated market concerns about the future prospects of the US economy. Slowing labor market demand and increased pressure on consumer spending suggest that current monetary policy is no longer suitable for the current economic environment. The weakness in the labor market and declining consumer confidence are forcing the market to focus on whether further interest rate cuts are needed to stimulate the economy.
Data shows that demand in the labor market is cooling. While job growth remains strong, underlying risks have emerged. The number of job openings has fallen sharply since its peak, companies' willingness to hire has weakened, and wage growth has slowed in many industries. Companies are adjusting their strategies to adapt to this increasingly sluggish market environment, making the past competition for employees less intense.
Changes in consumer behavior and rising credit pressure
Significant changes have also occurred in another major pillar of the US economy: household consumption. Household spending has been a key driver of US economic growth for the past two years, but as excess savings accumulated during the pandemic have gradually been depleted, consumer spending has become more cautious. Although the credit market remains operational, consumers have become more discerning due to a slight increase in default rates, particularly in spending on non-essential goods.
Consumer spending remains a key driver of economic growth, but growth momentum has slowed significantly. This shift signals a change in market risk, moving from an overheated state to potential over-tightening. Market participants are beginning to worry that continued monetary tightening could further exacerbate downside risks to the economy.
Inflation risk has decreased
Meanwhile, the inflation situation in the United States has also changed significantly. Commodity prices have remained stable, and with slower wage growth, inflationary pressures in the service sector have eased considerably. Supply chain issues have gradually eased, and supply-side pressures have normalized, which has significantly reduced the risk of inflation in the United States.
Although inflation remains above the Federal Reserve's target, its trajectory and risks have fundamentally changed. The likelihood of another inflationary shock has significantly decreased. The high interest rates previously set to combat an overheated economy appear overly aggressive in the current economic climate. Maintaining such a tight policy could exert unnecessary downward pressure on the economy.
Financial Market Reaction: Expectations of Interest Rate Cuts Spark Positive Sentiment
For global financial markets, the expectation of an imminent interest rate cut by the Federal Reserve is undoubtedly one of the biggest focuses at present. Market sentiment is expected to shift, with stocks rebounding in anticipation of easing policies and investor enthusiasm increasing. In the past few months, fund flows in the stock market have expanded from defensive sectors to a wider range of areas, indicating a reassessment of the economic growth outlook.
Furthermore, the bond market has also reacted to expectations that the interest rate peak may have passed. As investors adjust their duration exposure and reassess the future policy path, bond yields are likely to fall further. This will further ease pressure on financial markets, especially after years of monetary tightening, which is expected to improve the outlook for the fixed-income market.
The US dollar may weaken, and interest rate cuts will trigger changes in global capital flows.
In the currency market, the US dollar will also be indirectly affected. As US policy gradually shifts towards easing, the dollar may weaken due to reduced yield support. Global capital flows will become more diversified, meaning the low-interest-rate environment in the US will have a profound impact globally. A weaker dollar will create more opportunities for other emerging markets, which may also prompt a rebound in risk appetite in global financial markets.
Furthermore, low-interest-rate policies may help alleviate economic pressures in emerging markets and further support global economic growth. As global financial conditions gradually ease, cross-border investment may also regain momentum, paving the way for future economic recovery.
With December 9th approaching, market expectations for an interest rate cut are gradually stabilizing. For investors, the economic rationale for a rate cut is becoming increasingly clear, and market sentiment is preparing for a shift in monetary policy. In the coming months, US monetary policy will undergo further adjustments, which will not only impact the US economy but also influence the global market landscape. The monetary cycle will enter a new phase, and the market will closely monitor how the Federal Reserve adjusts its policy, viewing this policy direction as a guide for future economic development.
This article, "What Impact Will the Fed's Rate Cut Next Week Have on Financial Markets, the Dollar, and Investors?", originally appeared on ABMedia ABMedia .
