The Global Economy has seen much turbulence in the past 4 years. Irrational decisions made in 2020, made it difficult for a speedy recovery, for economies around the world, especially the underlying strength in emerging economies before the Pandemic.
The Federal Reserve, as well as the European Central Bank, set the precedent early on for lowering interest rates to lower inflation. The consequence of this was relatively low unemployment rates early until Q3 2023, specifically in the US. In the Fed’s mind, the optimal point of ‘full employment’ in the US economy, is when the unemployment rate hits 4 percent. For this very reason, the Fed had begun increasing interest rates and making the cost of borrowing higher for consumers.
This was part of their Quantitative Tightening measures, but again was unsuccessful for the better part of two years, given the overall resilience in the American economy. One can argue about the political implications of certain parties in power-but solid legislation, including the Inflation Reduction Act, and the continuation of the Jobs act, is what kept high monthly jobs numbers, and repelled fears of a monetary policy induced recession.
In May, as spending in the economy continued to cool, unemployment approached its 4 percent target, and the Fed had started to discuss lowering rates by the year’s end. Now, it is the year’s end.
For Americans, the overall cost of financing is to significantly lower. The automobile and housing market are to be specifically be a point of interest of consumers.
The Fed lowered rates by a half a point in September, and then again in the beginning of this month, approaching its annual December retreat where it’s expected to lower them even further, with unemployment for October, at 4.1 percent. It’s important to remember that this whole argument about high prices in the US did revolve around the Post-Covid monetary policy, which is could give whoever takes office next year in the US, an upper hand of the collateral advantage caused by the Fed.
Now, what does this mean for the American consumers and the overall Global Economy?
For Americans, the overall cost of financing is to significantly lower. The automobile and housing market are to be specifically be a point of interest of consumers.
More demand for high yielding industries increases overall jobs in the economy, and this circularity could end up impacting the further strength in the US economy, and keep it resistant to future potential economic challenges.
Also, to the point of post-election rate cuts, there isn’t much to do with politics, as it is policy. Republicans are likely to offer a sweeping range of new tax cuts for the wealthy and the rich. It is merely a coincidence that this policy will coincide with coupling rate cuts, making economic activity for the powerful more affordable, relying solely on the circularity effect, for the dueling cuts to actually impact the American people.
For the Global Economy, it brings in this prospect of trade advantages. A stronger US economy, and lower interest rates, means that the potential weakness of the US Dollar.
This will make international goods more expensive for American consumers, who are already part of the world’s highest spending economy. But on the other hand, American goods will be cheaper abroad, so a bunch of countries, with debt issues could potentially see themselves increase that gap at a decreasing rate, unlike the accelerating debt they retain at present.
In terms of global policy, most central banks follow suit of the Fed. This year, the European Central Bank (ECB), has also made two rate cuts. This is pretty significant for the Eurozone, especially given that the European Labor Market has not shown the same strength shown by the US Labor Market-with recovery likely to be slow. But for this reason of slow growth in the economy, the ECB is widely expected to make a big cut in its December meeting.
At the core of this, are ratings made by international agencies, signaling towards a loss in producer confidence in the economy, as well as the fact that Germany and France’s Producer Manager Index (PMI), has been falling for the last two years in monthly ratings.
This essentially means that upstream and downstream activity in French and German Supply Chains, has been relatively decreasing and hurting the prospect for manufacturing and non-manufacturing businesses to thrive both locally and abroad. The IMF has lowered the Eurozone’s economic outlook to 0.8 percent in 2024 and 1.2 percent in 2025, for this very reason.
In conclusion, there is a point of optimism in all of this, especially given the fact that the top global interest rate policymaker, Jerome Powell, has indicated his support for lowering rates. Frankly, he’s as conservative as it comes to monetary policy. In a statement he said that, his “mandate is maximum employment, price stability, and we think that even with today’s cut, policy is still restrictive. We understand it’s not possible to say precisely how restrictive it is still.”
The writer is a columnist and a linguistic activist.