Investors see an 80% chance of a 25-basis-point rate cut. This first cut since December 2024 may be announced as soon as at the September 17 FOMC meeting.
Every trader focuses on the US interest rate, which impacts all global markets. The markets will react with volatility regardless of what you expect to learn at the next FOMC event. Deposit to prepare, and read on to learn why the key rate matters.
Why does everyone watch the US interest rate?
Amid global economic and political uncertainty, the US key rate has remained unchanged for a long time. At the same time, the central banks of the European Union, the UK, and many other countries continued to use this tool to cope with inflation and unemployment, stimulate the economy, or impact currency rates and capital flows.
The US key rate cut has been discussed for many months now. All market players expect it, while the Fed has faced unprecedented pressure from the Trump administration. Since the health of the US economy and the US dollar performance impact most global markets, all eyes are now on the Fed.
What does the key rate impact?
•Economic growth
Any changes affect all loans. Lower rates decrease the cost of financing and encourage people to invest and buy more cars or real estate. When loans become less accessible because of higher rate, businesses and households cut spending, which causes a slowdown in economic growth.
•Inflation
A tight policy curbs demand and slows economic growth. Loose policy makes loans cheaper and stimulates economic activity, thereby increasing inflation.
•Employment
A higher rate increases business costs, leading to layoffs or less hiring. As a result, we can expect higher unemployment. A low rate, on the other hand, allows companies to expand their workforce.
•Currencies and capital flows
High yields on Treasury bonds and other dollar-denominated assets attract foreign investors, strengthening the US dollar and stimulating demand. Even expectations of a change in the Fed’s policy impact the markets, as traders view a hawkish or dovish stance as a potential change in yields.
5 factors suggesting a change in the Fed’s policy
What will the Fed do?
Opinions in the Fed vary widely, suggesting a search for balance between the dovish and hawkish approaches. Inflation and employment data released in September will determine the decision.
•Any change will be merely a policy adjustment, not a full-scale easing.
•The Fed acknowledges that current rates (4.25–4.50%) are much higher than its neutral estimate of about 3%.
•At the same time, supporters of a tighter policy warn against premature rate cuts, as core inflation still exceeds the target level.
How should traders react?
The US dollar has formed a descending channel pattern. The price has almost dropped to the lower trend line, and MA50 has crossed MA200, forming a death cross, a bearish indicator.
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