As the U.S. Federal Reserve (Fed) is all but certain to deliver a widely anticipated interest rate cut on Wednesday, the first in four years, the decision will have far-reaching effects, resonating well beyond the United States.
The size of a first move and the scale of overall easing remains open to debate, while a looming U.S. election is another complicating factor for global investors and rate setters looking for a steer from the Fed and pinning hopes on an economic "soft landing."
It's likely to be just the first in a series of rate cuts that should make borrowing more affordable now that the Fed has deemed high inflation to be all but defeated.
At the same time, plenty of uncertainty still surrounds this week's Fed meeting.
How much will the policymakers decide to reduce their benchmark rate, now at 5.3%? By a traditional quarter-point or by an unusually large half-point?
Will they keep loosening credit at their subsequent meetings in November and December and into 2025? Will lower borrowing costs take effect in time to bolster an economy that is still growing at a solid pace but is clearly showing cracks?
Chair Jerome Powell emphasized in a speech last month in Jackson Hole, Wyoming, that the Fed is prepared to cut rates to support the job market and achieve a notoriously difficult "soft landing."
That is when the central bank manages to curb inflation without tipping the economy into a steep recession and causing unemployment to surge.
It's not entirely clear that the Fed can pull it off.
"We don't know yet what kind of cycle this is going to be – will it be like 1995 when there was just 75 bps of cuts or 2007-2008, when there was 500 bps?" said Kenneth Broux, head of corporate research, FX and Rates at Societe Generale.
Many economists would like to see the Fed announce a half-point rate cut this week, in part because they think the officials should have begun cutting rates at their previous meeting in July.
Wall Street traders on Friday signaled their expectation that the Fed would carry out at least two half-point cuts by the end of the year, according to futures prices.
Yet, analysts say there could be downsides to implementing a half-point rate cut this week. It might signal to the markets that the Fed's policymakers are more worried about the economy than they actually are.
Here's a look at what is in focus for world markets:
In spring, as U.S. inflation proved stickier than expected, investors questioned how far others, such as the European Central Bank (ECB) or the Bank of Canada, could cut rates if the Fed stayed on hold this year before their currencies weakened too far, adding to price pressures.
U.S. cuts could finally start comforting regions facing weaker economies than the United States.
Traders added to bets for rate reductions by other central banks as Fed rate-cut expectations grew recently.
Yet they price fewer cuts in Europe than for the Fed, with the ECB and Bank of England (BoE) sounding more vigilant around remaining inflation risks.
Confidence in Fed cuts starting is a boon for bond markets globally that often move in lock step with Treasuries.
U.S., German and British government bond yields are all set for their first quarterly fall since end-2023, when a Fed pivot was anticipated.
Lower U.S. rates could give emerging market central banks more room for maneuver to ease themselves and support domestic growth.
Around half of the sample of 18 emerging markets tracked by Reuters have already started cutting rates in this cycle, front-running the Fed, with easing efforts concentrated in Latin America and emerging Europe.
But volatility and uncertainty around the U.S. presidential election clouds the outlook.
"The U.S. election will have a major bearing on this because, depending on various fiscal policies, it really complicates the cutting cycle," said Trang Nguyen, global head of EM credit strategy at BNP Paribas.
"We could see more idiosyncratic actions among central banks on the back of that."
Those economies hoping U.S. rate cuts will weaken the robust dollar further, lifting their currencies, may be disappointed.
JPMorgan notes the dollar has strengthened after the first Fed cut in three out of the last four cycles.
The dollar outlook will be driven largely by where U.S. rates are relative to others.
The safe-haven yen and Swiss franc could see their respective discounts to U.S. rates almost halve by end-2025, Reuters polls suggest, while sterling and the Australian dollar may only acquire a marginal yield advantage over the dollar.
Unless the dollar becomes a real low-yielder, it will continue to hold its appeal among non-U.S. investors.
Asian economies, meanwhile, have led markets' front-running of U.S. cuts, with South Korea's won, the Thai baht and Malaysian ringgit surging through July and August. China's yuan has wiped out year-to-date losses versus the greenback.
A global equity rally, which faltered recently on growth fears, could resume if lower U.S. rates boost economic activity and mean recession is avoided.
World stocks tumbled more than 6% in three days in early August following weak U.S. jobs data.
"You always have a wobbly market around the first cut because the market wonders why central banks are cutting," said Barclays head of European equity strategy Emmanuel Cau.
"If you have a cut without a recession, which is the mid-cycle script, usually the markets tend to go back up," Cau said, adding that the bank favored sectors benefiting from lower rates, such as real estate and utilities.
A U.S. soft landing should also play well in Asia, although the Nikkei has fallen more than 10% from July's record high on a rising yen and as Japan's rates rise.
In commodities, precious and base metals such as copper should benefit from Fed rate cuts, and for the latter, the demand outlook and a soft landing are key.
Lower rates and a weaker dollar, reducing not just the opportunity cost of holding metals but also of buying them for those using other currencies, could fuel momentum.
"High rates have been a critical headwind to base metals, driving a significant negative physical demand distortion from destocking and weighing on capital-intensive end-demand segments," said MUFG's Ehsan Khoman.
Precious metals could also gain.
Gold, which typically has a negative relationship with yields as most demand is for investment purposes, usually outperforms other metals during rate cuts. It is at record highs, but investors should be cautious, said the World Gold Council's John Reade.
"Speculators on the Comex gold futures markets are positioned for this," said market strategist Reade. "It could be a case of buying the rumor and selling the fact."
