Central bank rate cuts can affect the global economy in two ways

The Federal Reserve is set to cut interest rates at its September meeting after Chairman Jerome Powell said in a speech at the Jackson Hole Economic Forum on Friday that „the time has come.” The development raises questions about the potential global impact of central bank rate cuts.

To shed light on the matter, International Monetary Fund (IMF) Chief Economist Pierre-Olivier Gourinchas joined the Yahoo Finance Fed Correspondent. Jennifer Schoenberger from Jackson Hole, Wyoming to discuss his perspective on the US and global financial systems.

Gourinchas notes that the U.S. economy is doing „very well,” with inflation slowing, economic activity picking up, and the labor market cooling.

„From this point of view, I think the central bank’s approach is absolutely appropriate,” he says, adding that the central bank has highlighted reduced inflation risks, thus leaving room for rate cuts.

Currently, Gourinchas expects a rate cut in 2024. However, if economic data continues to support this trend, „I think we can expect a little more than that.”

Regarding the impact on global markets, Gourinjas outlines two possible scenarios after the US Federal Reserve begins a rate-cutting cycle: In a positive scenario, the interest rate gap between the US and other countries could narrow, supporting global currencies and allowing emerging markets to grow. lowering their own rates; Alternatively, a sharp cooling of economic activity could negatively impact emerging market economies if it forces the central bank to ease more aggressively.

„The mandate of many central banks is really to make sure there is price stability first,” Gourinchas tells Yahoo Finance. He adds:

„When inflation comes down and you get closer to the central bank’s targets,​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ances, the bigger picture, as we see now with the Federal Reserve and as we have seen with other central banks. Labor market pressures are no longer contributing to inflationary pressures or not significantly , then I guess you start to wonder.

Watch Federal Reserve Chairman Jerome Powell’s full speech here.

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This post was written by Angel Smith