The central bank has recently made a significant move. Following the interest rate cut by the Federal Reserve, countries around the world have been watching how China responds, with some even questioning the state of China's economy.

Just when countries thought China would "give in," the central bank suddenly announced an interest rate cut of 25 basis points, marking China's third interest rate cut this year.

This interest rate cut can be said to have completely shattered foreign doubts about China and represents a significant counterattack by China in the economic arena. So, will the Federal Reserve's schemes still succeed?

Interest Rate Hikes and Cuts

The Federal Reserve, also known as the central bank of the United States, has an important responsibility to determine the country's monetary policy, with the most eye-catching aspect being the decision to raise or lower interest rates.

An interest rate hike is when the Federal Reserve increases interest rates, which typically makes the cost of borrowing higher. Why act in this way? The main reason is to control an overheated economy and prevent inflation from spreading too quickly.

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Imagine if there is too much money in the market, and everyone is competing to buy goods. In this case, how could the prices of goods not rise?

Therefore, when the Federal Reserve raises interest rates, bank lending rates will increase, and the cost of borrowing for businesses and individuals becomes higher. Naturally, they will be more cautious and not borrow and consume as recklessly.

However, interest rate hikes are not all beneficial. For example, they may slow down economic growth because the difficulty of borrowing for businesses and individuals increases, thereby affecting investment and consumption.

For the stock market, it is also not good news because the cost of borrowing for investors to invest becomes higher, which may lead to reduced investment and a potential stock market decline.Conversely, a rate cut is when the Federal Reserve lowers interest rates. This typically occurs when the economy is not doing well and growth begins to slow down.

A rate cut aims to reduce the borrowing costs for businesses and the general public, encouraging them to be more inclined to take out loans, invest, or spend, thereby stimulating economic vitality and promoting economic development. As a result, the flow of funds in the market becomes more active, and the economy can be stimulated to a certain extent, gradually regaining vitality.

Admittedly, rate cuts are not without drawbacks, and the issues they present cannot be ignored, such as the potential to trigger inflation. Because when money becomes cheaper, everyone rushes to borrow, and when there is an excess of money in the market, the prices of goods and services may rise.

Moreover, using rate hikes and rate cuts as a means of "sheep shearing" on a global scale is a common tactic employed by the Federal Reserve.

The Influence of the Federal Reserve

When the Federal Reserve raises or lowers interest rates, this move can be seen as their customary method of "sheep shearing" in the global economy. In simple terms, the Federal Reserve controls the cost of borrowing to influence the direction of global funds.

When interest rates are high, the willingness of businesses and individuals to borrow decreases, and investment and consumption activities naturally decline. As a result, economic activity within the United States slows down slightly. However, high interest rates also attract global funds to flow into the United States because investors believe they can get higher returns in the U.S.

This means that the U.S. dollar becomes more valuable, while the currencies of other countries relatively depreciate. However, this is beneficial for imports, as imported goods become cheaper.

On the contrary, if the Federal Reserve decides to cut interest rates, the cost of borrowing comes down. This is usually done to give the economy a boost, making businesses and individuals more willing to borrow, invest, and consume.

Once interest rates are lowered, money flows out of the United States like water, seeking more profitable investment opportunities around the world. This can sometimes lead to asset bubbles in countries that receive a large influx of funds, as there is suddenly an excess of money in the market with nowhere to go.At the same time, if the US dollar depreciates, American exports will become more attractively priced in the international market. However, imported goods will become more expensive as a result.

The Federal Reserve's actions are akin to "sheep shearing" on a global scale. By controlling interest rates, they influence the flow of global capital, thereby affecting the economic conditions of other countries to some extent.

Such practices can cause economic fluctuations and even crises in other countries. For instance, the Latin American debt crisis of the 1980s and the Southeast Asian financial crisis of 1997 were both related to the Federal Reserve's monetary policy.

China's Response

The Federal Reserve System of the United States, or the Fed, has recently adjusted its monetary policy by announcing a reduction of 50 basis points. In simple terms, this move is intended to lower the cost of borrowing to stimulate economic growth within the United States.

Watching this development, the People's Bank of China (PBOC) has also begun to contemplate its own strategy. After all, as the world's primary reserve currency, the US dollar, any decision by the Fed has a significant impact on the global economy. In response to the US dollar's interest rate cut, the PBOC has decided to follow suit by reducing its own interest rates by 25 basis points.

Why has the PBOC chosen to do this? Firstly, lowering interest rates reduces the cost of borrowing, which is good news for businesses looking to take out loans. With lower borrowing costs, businesses are more willing to borrow money to expand production and invest in research and development, thereby increasing economic vitality.

Of course, there are downsides to lowering interest rates, such as the potential to increase inflationary pressure. When money becomes cheaper, and everyone borrows more, the increased money supply in the market could lead to rising prices. However, when deciding to lower interest rates, the PBOC must have weighed various factors and concluded that the benefits of lowering rates outweigh the drawbacks.

This move by the PBOC also sends a signal to the world: China's economic policies are flexible and can be adjusted in a timely manner in response to changes in the international situation.

By doing so, not only can domestic economic stability be maintained, but international confidence in China's economy can also be strengthened. This demonstrates China's ability to respond to changes in the external environment and to maintain the health and sustainable development of its economy.In general, the People's Bank of China has cut interest rates by 25 basis points, which is a strategy in response to the Federal Reserve's rate cuts. This not only helps domestic companies reduce loan costs and stimulate consumption and investment, but also, to some extent, mitigates the potential impact of the Fed's rate cuts on China's economy.

Of course, the People's Bank of China will certainly continue to closely monitor the economic situation at home and abroad in the time to come, and be ready to take necessary measures at any time to maintain the stable and healthy development of the economy.