Fed Cuts Interest Rates: A Balancing Act on the Global Stage

The U.S. Federal Reserve lowered benchmark interest rates by 25 basis points on Wednesday afternoon. Surprisingly, however, a slower monetary policy course emerged than investors had expected. Only two more rate cuts are projected for 2025. This announcement led to a strengthening of the U.S. dollar, while the broader markets declined due to the news. Thierry Wizman, a strategist for global currencies and interest rates at Macquarie, shared his assessments of the dollar's development in the Morning Brief. According to Wizman, the Fed currently presents itself as "more restrictive" in light of potential inflation risks ahead of the upcoming Trump administration. In addition to the Fed's influence, the monetary policies of other central banks are significantly more expansive: The ECB is planning further rate cuts, the Bank of Canada is already acting aggressively with rate cuts, the Bank of Japan is hesitant with rate hikes, and the Bank of England is maintaining its current interest rate. Wizman explains that while the Fed is becoming more restrictive, all other major central banks are pursuing a more expansive course. This stance of foreign central banks reflects the potentially disinflationary effects of the proposed tariff measures of the Trump administration on their economies. Regarding the market implications, Wizman noted that a strong dollar could lower bond yields as it fosters some disinflation in the U.S. Furthermore, this could motivate investors to shift from U.S. stocks to foreign securities, as the differing monetary policy approaches could potentially support stock markets abroad.