What effect does the US rate uncertainty have on the rest of the world?
With the Federal Reserve (Fed) stating that rates need to stay high until inflation is clearly moving towards the Fed’s 2% goal, this stance can have a significant impact on the global economy. Here are three things to keep an eye out for:
- Currency Appreciation: A hike in rates can lead to an appreciation of the US dollar relative to other currencies. This happens as foreign investors invest in locations with higher interest rates, increasing demand for the dollar.
- Foreign Trade: If the dollar is strong, this can boost demand for imported goods in the US, benefiting foreign companies.
- Foreign Banks: Many central banks in other countries often follow the Fed’s lead, meaning that interest rates may stay higher in other countries until the Fed changes their rate.
However, in the unlikely scenario that the Fed cuts rates, other than the opposite effects of what’s mentioned above, we will also see:
- Global Financial Markets: A cut in interest rates can affect global asset prices and investment flows. This is due to the US being one of the largest and most liquid financial markets in the world.
- Emerging Markets: Lower US interest rates can reduce the burden of dollar-denominated debt and potentially encourage capital inflows.
With all of this, you can see how a large proportion of investments can pivot around one central issue, which really highlights the need for a diversified portfolio.
Please note, the above is for educational purposes only and does not constitute advice. You should always contact your advisor for a personal consultation.
* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.