How Fed rate cuts affect the global economy

The Federal Reserve's interest rate decisions can influence the trajectory of the U.S. economy.

"The U.S. economy's stature is one of the key drivers of the importance of the Fed," said Gregory Daco, chief economist at EY-Parthenon. "The [U.S.] economy remains one of the largest economies in the world, and certainly of late, one of the ones that's been fastest growing."

At its September meeting, the Federal Open Market Committee, decided to reduce the target range of its widely impactful federal funds rate. Changes to the Fed's interest rate can influence the cost of loan products such as mortgages and the value of cash, bonds and stocks.

The Fed's decision to unwind its most recent economic tightening cycle is expected to be felt around the world. By August 2024, annual inflation was 5.9% globally, according to the International Monetary Fund. The group also reported that inflation was closer to 2.6% on average across advanced economies like the United States.

The Federal Reserve's decision to cut interest rate comes after months of shaky labor market data in the U.S. The unemployment rate stood at 4.2% in August 2024 with 7.1 million Americans without work, little changed from recent months. But the jobs picture had darkened notably from a year ago, when unemployment was 3.8%, with 6.3 million Americans looking for work.

The central banks of advanced economies around the world hiked interest rates to ward off a global bout of inflation. Economists have noted that the simultaneous tightening of conditions across borders could amplify their effects. The European Central Bank also has reduced its policy rate twice in 2024.Global GDP growth is expected to be 3.2% in 2024 and 3.3% in 2025 according to the IMF.  

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