Hessa Abdulla Sultan Binawad AlNuaimi

The writer is a research assistant at TRENDS Research & Advisory

After months of push and pull between the US president and Federal Reserve officials, the decision to cut the federal funds rate by 0.25% point - bringing it into the range of 4% to 4.25% - has drawn widespread global attention.

A sense of anticipation now prevails regarding the implications of the start of a new cycle of US monetary easing after a pause of nearly a year, with expectations that this cycle will extend beyond the current year, 2025.

While one eye of the Federal Reserve was fixed on inflation expectations and the other on labor market indicators and job growth, the world's attention - particularly in countries most closely tied to US financial markets such as the Gulf states - are now directed toward assessing the consequences and repercussions of this shift on global economic variables: from its impact on strained international trade beset by fierce tariff wars, to its effects on shifts in global liquidity and pressure on the dollarisation system; from its connection to risks of monetary uncertainty resulting from declining credibility and independence of monetary policies, to its links with capital movements in a global economy suffering from fragmentation and decoupling.

The first and most immediate outcome of this US monetary shift will be a wave of interest rate cuts by central banks around the world, as part of broader efforts to compete for export-oriented production activities. However, a global environment characterised by lower interest rates will contribute only marginally to addressing the challenges of international trade, given the ever-worsening tariff and non-tariff barriers that dominate its environment.

If there is a positive benefit to the wave of lower interest rates worldwide, it will be reflected in two main areas.

The first is increased consumption and investment growth in domestic markets; lower borrowing costs are expected to stimulate consumer spending and corporate investment, particularly in sectors such as real estate, retail trade, and tourism. Lower credit costs may also encourage expansion in small, medium, and large enterprises alike.

The second benefit lies in boosting demand in stock markets and foreign investment markets; cheaper borrowing will enable companies to increase their international investments. Accordingly, financial markets in emerging and developing economies with relatively high interest rates are expected to witness a new wave of inflows of foreign indirect investment.

On the other hand, undoubtedly, the Federal Reserve's new rate cut is expected to have repercussions. The most significant impact on the international monetary system will come if the Fed's credibility and independence are shaken.

In such a case, global financial markets will face an unprecedented state of uncertainty about the Fed's response to future inflation shocks. This widespread uncertainty in the international economic environment would complicate central banks' monetary policies and limit their effectiveness in anticipating and combating inflation.

In addition, a quick look at international liquidity conditions and developments in payment systems and international reserves confirms that this rate cut remains cautious of the risks of a weaker dollar against major currencies.

This comes amid the challenge led by some countries to the dollar-dependent international monetary system, a confrontation that accelerated following the tariff policies adopted by US President Donald Trump. As a result, a sharper-than-expected decline in the dollar could become a burden on the Federal Reserve, and hinder the continuation of the monetary easing cycle in the foreseeable future.