Introduction 

Wednesday, March 20, was a difficult day for Indian markets, with the Nifty falling 200 points over the day before closing in the green with negligible gains. A significant worldwide event—the FED’s announcement on interest rate cuts, which is scheduled for tomorrow—was the catalyst for the volatility. However, why is the market so fixated on the US Fed’s ruling? Let’s attempt to locate the solution in the explanation provided. 

Why does the FED matter?

Let’s start by defining the FED and discussing its significance. To put it simply, the FED is the US counterpart of the RBI in India. As such, it is in charge of establishing and overseeing monetary policy, regulating banks, preserving financial stability, creating jobs, and more. Ultimately, it may be argued that the Fed is in control of every financial issue affecting the US economy. Any choice the Fed makes or modifies has an immediate effect on the global stage because the US economy is the largest in the world.

This brings us to the second most crucial query: why is it important? The Fed operates similarly to the RBI, which determines the interest rates that will be applied to loans and how the economy will combat inflation by deciding whether to raise or lower the prices of certain goods and services. The FED regulates the US marketplace, whereas the RBI regulates the Indian market. That is the only distinction. 

Due to its role as a creditor, the US controls the world’s markets. This indicates that the US economy helps other economies by lending money for a variety of uses. The United States makes a substantial contribution to global financial organisations such as the International Monetary Fund (IMF) and the World Bank. With the dollar serving as the major reserve currency of the globe, the US economy is essentially a global banker. U.S. dollars make up a sizable portion of the foreign exchange reserves of many nations, and they are frequently used as the currency for international trade and lending. The United States has substantial economic leverage and the capacity to affect international economic conditions as a result of its supremacy.

The US serves as an anchor in the global financial system because of these numerous dependencies. Therefore, when the Fed announces a rate cut or raise, it’s not just a shift in domestic policy; it’s a signal that has several effects on the global economy.

How does the FED’s rate cuts affect the global market?

The FED controls the attitudes that drive the world’s markets. Consider a scenario in which the Federal Reserve raises interest rates on bank and financial institution borrowing. The banks will begin charging their borrowers—which includes both businesses and private citizens—more since they must pay more interest on their borrowings. Businesses begin to charge more for their services when they are forced to pay more. India will be required to pay more, in dollars, as a borrower of US services. Prices in India may increase as a result of the higher cost of purchasing goods from the United States. People tend to spend less when prices rise because goods become more costly. Price increases will cause people to spend less, and since they will want to preserve their money in safer places like bonds and banks, there will be more liquidity. The FED manages the world economy in this way. Although the explanation above is only a basic one, the following discusses the specific implications of the Fed’s rate-cut announcements:-

1. The Fed affects interest rates and investment flows worldwide.

The federal funds rate, or the interest rate at which banks lend to one another overnight, is determined by the Fed. This rate has an indirect impact on other interest rates in the economy, such as those for savings, loans, and mortgages. The federal funds rate is frequently monitored as a global stock market indicator since changes in it might have an impact on inflation and economic growth. There is a possibility that

2. Affecting the value of currencies

The U.S. dollar’s value is influenced by Fed rate decisions. A rate cut may result in a declining value of the dollar, which would increase the cost of imports and perhaps cause inflation while also making U.S. exports more affordable and competitive elsewhere. However, a rate increase may strengthen the dollar’s hold, making exports more costly for overseas consumers while imports become more affordable.

3. International borrowing expenses

Since many foreign loans are in U.S. dollars, as was previously indicated, shifts in the Fed’s interest rates can have an impact on borrowing costs all around the world. A rate reduction might ease financial strains by lowering the cost of servicing dollar-denominated debt for firms and other nations. On the other hand, a raise may have the opposite effect, increasing the cost of servicing debt and thus causing financial difficulty.

4. The dominant sentiment in the economy

As a gauge of the state of the US economy, the Fed’s actions are widely monitored. A rate drop could be interpreted as an attempt to boost a faltering economy, which could boost investor confidence and global economic attitudes. What the Fed’s actions suggest about the state of the global economy, not just the US economy, may cause markets to respond.

5. Prices of commodities

Fed policies that affect the value of the dollar can also affect commodity prices because many commodities are priced in U.S. dollars. After a rate drop, a declining dollar can lower the price of commodities in other currencies, which could raise demand and prices. For nations that import or export large quantities of these goods, this may have far-reaching consequences.

Conclusion

These are undoubtedly some of the most crucial things a trader or investor should keep in mind, even though the preoccupation doesn’t stop here. It makes sense that the world markets are eagerly awaiting the US Fed’s announcements, as the Fed is poised to take centre stage tomorrow. Because these decisions have a cascading effect that extends beyond the boundaries of the United States, impacting everything from inflation rates in other nations to the general mood of the global economy, the expectation grows. Whether rates are lowered, held steady, or raised, the effects will be thoroughly considered and felt globally, underscoring the Fed’s critical position in the global economy as well as the US economy.