On June 5th, the Bank of Canada announced a rate cut of 25 basis points, and the European Central Bank also plans to start cutting rates in June. This series of rate cuts will put the Federal Reserve in a passive position.
Many people may not understand why this is happening. Logically, when the Federal Reserve raises interest rates, countries must follow suit to retain capital and prevent their currencies from being harvested by the US dollar exchange rate, otherwise they would be at a disadvantage.
However, after the Federal Reserve has implemented a series of aggressive rate hikes, the capital that should have flowed out from various countries has essentially done so. Continuing to follow the Federal Reserve's rate hikes can prevent being harvested by the US dollar exchange rate, but maintaining high interest rates will increase the debt risk of the country and affect the normal production activities of domestic enterprises, ultimately causing adverse effects on the national economy.
As a result, after various considerations, Europe believes that lowering interest rates is more beneficial to the economic development of the region, and thus has decided to cut rates.
Some people might ask, what if the euro exchange rate is suppressed by the US dollar after the rate cut, and it gets harvested by the US dollar?For this issue, it has already been mentioned earlier that after the Federal Reserve raised interest rates, almost all the capital that could leave Europe has done so, and those who did not leave are unlikely to do so again.
As a result, even if the Federal Reserve continues to maintain high interest rates while Europe adopts measures to lower interest rates, although this will cause some exchange rate fluctuations leading to a devaluation of the euro, it will not lead to another large-scale capital outflow.
When the situation of large-scale capital outflow does not occur, the decline in the euro's exchange rate against the US dollar will be relatively limited, and thus will not trigger a large-scale devaluation of the euro.
Of course, at this time, those holding US dollars may take the opportunity to harvest euros, but the problem is that they dare not harvest.
Because no one dares to bet that the Federal Reserve will not raise interest rates again. If they harvest euros and then the Federal Reserve raises interest rates again, their capital will be trapped in Europe.
The reason is very simple. Once they exchange their US dollars for euros, if the Federal Reserve raises interest rates again, their euros will depreciate against the US dollar, which means their capital will be significantly reduced.
Therefore, even if the euro's exchange rate against the US dollar declines after Europe lowers interest rates, no one dares to take the risk of harvesting euros. Even if someone takes the risk to harvest, even if the Federal Reserve does not raise interest rates again, as long as the current interest rates remain unchanged in the long term, their capital will be trapped in euros.
As a result, Europe's announcement of lowering interest rates is really beneficial to them, and any capital that wants to take the opportunity to harvest euros will eventually leave their capital in Europe.In response to this, I can only say that Europe is truly clever. Their interest rate cuts not only reduce the debt pressure in the European region but also take advantage of currency devaluation to strengthen currency exports to the United States, thereby enhancing the economic competitiveness of the European region. What's more astonishing is that dollar capital dare not harvest them.
These things are truly magical, as this is a situation that has never appeared in financial textbooks before, which makes people marvel.
So, what actions will the Federal Reserve take after Europe lowers interest rates?
As for how the Federal Reserve will respond to Europe's interest rate cuts, I personally do not know and am unclear.
However, one thing can be confirmed: no matter what methods the Federal Reserve adopts to deal with it, the Federal Reserve will die, even if it maintains the current exchange rate unchanged.
The first scenario is that after Europe lowers interest rates, if the Federal Reserve raises interest rates violently again.
Logically speaking, after Europe lowers interest rates, the Federal Reserve will inevitably raise interest rates violently again to force Europe to give up the interest rate cut, thereby expanding the exchange rate difference between the dollar and the euro.
However, as mentioned earlier, the Federal Reserve expanding the exchange rate difference between the dollar and the euro does not have much significance. This is because there is no capital left in the European region that can flee, and no matter how large the exchange rate difference is, it will not cause a large-scale devaluation of the euro. In addition, as long as the Federal Reserve does not provide a specific time for interest rate cuts, no one dares to harvest the euro.From this, the Federal Reserve, by raising interest rates again, widens the exchange rate gap between the dollar and the euro. Not only will this not harm Europe, but it will also increase the competitiveness of European goods in the US market, stimulating economic development in Europe.
On the contrary, if the Federal Reserve raises interest rates violently again, it will only exacerbate the debt burden in the United States, adding fuel to the fire of the US debt crisis.
The second scenario is that after Europe lowers interest rates, the Federal Reserve is forced to follow suit.
Once Europe lowers interest rates and the Federal Reserve also lowers interest rates, the global capital that the Federal Reserve previously absorbed through interest rate hikes will immediately leave the United States.
In this case, the Federal Reserve will face a situation where it loses both its "wife" and its "soldiers".
The "wife" here refers to the international capital that the Federal Reserve absorbed into the United States through interest rate hikes.
The "soldiers" here refer to the interest that the Federal Reserve needs to pay after a violent interest rate hike. It is important to know that after such a long period of violent interest rate hikes, the interest it needs to pay is as high as hundreds of billions of dollars.
Therefore, if the Federal Reserve follows Europe in lowering interest rates, it will lose hundreds of billions of dollars in interest for nothing, a significant cost.The third scenario is that after Europe lowers interest rates, the Federal Reserve maintains the current interest rates unchanged.
If Europe lowers interest rates and the Federal Reserve maintains the current interest rates unchanged, it would have two major negative impacts on the United States.
1. Maintaining high interest rates for a long time would exacerbate the U.S. debt crisis, making it difficult for American companies to secure financing.
2. Maintaining high interest rates for a long time would lead to the U.S. dollar's exchange rate remaining high relative to other countries' currencies, which would hinder the competitiveness of American products globally and be detrimental to the export of American goods.
Both of these negative factors point directly to the U.S. economy. If, after Europe lowers interest rates, the Federal Reserve maintains the current interest rates unchanged, it would ultimately kill American businesses and, in turn, kill the U.S. economy.