The Federal Bank of the USA (Fed) is expected to proceed on Wednesday with the first reduction in interest rates, since the start of the Covid-19 pandemic, and investors worldwide are reportedly gearing up for the effects that the specific – albeit foreseen – movement will have.

The Fed has lagged behind other central banks, which have already cut interest rates such as the ECB, the Bank of England, Canada, Mexico, Switzerland and Sweden.

Many of the aforementioned Central Banks appeared willing to move before the Fed, responding to the slowdown in growth and in reducing inflationary pressures. But analysts are wondering what other moves they could make before the Fed – the world’s largest central bank by asset value – follows suit.

The impact is global

It is a main source of concern the pressure exerted by interest rate differentials on currencies.

In general, higher interest rates attract foreign investors who they seek higher returnsboosting the value of local currencies as a result. For example, the Japanese yen and Turkish lira took a hit as their central banks kept interest rates low, while at the same time the US dollar – as measured in the “basket of currencies” – moved higher throughout 2022 , that is, the year the Fed was proceeding with interest rate increases.

Such differences make the work of central banks even more difficult they are trying to contain the price increaseas a weaker currency can cause inflation to rise as it increases the cost of imported goods.

However, apart from exchange rate differences, another important impact from the Fed’s interest rates will be that it will have on the American economyespecially given the recent “weak” labor market data and the possibility of a recession.

“As a major driver of global growth, it is expected to have an impact on asset prices around the world” said Richard Carter, head of fixed rate research at Quilter Cheviot, commenting on the Fed’s projected rate cut.

This concerns gold, the prices of which hit record levels this week amid expectations of a Fed move. Higher interest rates are generally seen as a drag on gold as they make fixed income investments like bonds more attractive, although this has not always been the case historically. Gold is also used as a hedge against inflation (which can increase as interest rates fall), while investors buy commodities and during times of market turmoil.

Oil and other commodities, which are mostly valued in dollarstypically get a boost from falling interest rates as lower borrowing costs are likely to stimulate the economy and increase demand.

A lot emerging markets are more volatile to these factors, making the Fed’s moves more important to them than to larger economies.

And the stock markets are affected by the Fed’s moves and not only in the US.

Much of the volatility in stock markets in recent months has been linked to speculation about when and by how much the US central bank will cut interest rates.

“The reduction in interest rates also reduces the cost of borrowing, thereby creating better liquidity conditions for businesses around the world” added Richard Carter.

Also, the reduction in interest rates will logically mean lower yields on US bonds, thus making the stock markets relatively more attractive for investments,” he said.