Happy Friday! Today we’re unpacking the imminent Fed rate cut but from a global perspective: What happens to currencies, cash, and savings when interest rates around the world converge?

The long reach of Fed cuts

Next week, the Federal Reserve will deliver its first rate cut since 2020.

Markets see a roughly three-in-four shot of it being a 25-basis-point move, though there is a limited chance of a jumbo half-point cut.

Either way, lower rates in the US will reverberate around the world. A new cutting cycle for the Fed means the rate differentials between central banks will narrow.

Since the Fed started hiking rates in 2022, attractive yields in money market funds have drawn in a record amount of cash from investors.

As of this week, $6.32 trillion is currently sitting in US money market funds, according to data from the Investment Company Institute.

Lower rates in theory could lead to investors pulling cash from these funds and deploying them in other assets, like stocks.

Meanwhile, when global rates converge, currency values should fluctuate less, and the so-called carry trade should be less attractive (again, in theory).

Remember, the carry trade works like this: People borrow currencies from a country where rates are low, like Japan, and use it to invest in currencies where rates are high, like the US.

In August, stock markets everywhere sold off when the carry trade for the Japanese yen started to come undone.

Given each economy’s varying degrees of growth and US outperformance, monetary policy choices have diverged since the pandemic.

Relatively weak recoveries in Europe and Asia helps explain why the European Central Bank and others decoupled from the Fed as far as their timing and pace of policy changes.

In any case, Bank of America sees the Fed initiating a series of 25-basis-point cuts through March 2025.

Greater confidence in what the Fed will do means more clarity for policymakers in every country. That in turn should help usher in “more convergence” for monetary policy, according to the firm’s analysts.

“The start of the Fed easing cycle does not just mean a re-coupling between US monetary policy and the rest of G10, but it also matters for emerging markets,” the analysts said.

So as the Fed kicks off its cutting cycle, the rate differentials between it and the benchmark rates of other countries should gradually shrink.

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Elsewhere:

💰️Americans’ net worths are at records. Between a surging stock market and sky-high real estate values, US households are sitting on more wealth than ever before. In the second quarter, household net worth increased 1.7% from the prior quarter to hit $163.8 trillion. (Reuters)

🏘️ Trump and Harris both want to fix housing. Both candidates aim to soften the housing affordability issues that have plagued Americans for years. Harris has proposed $25,000 in down payment assistance for certain buyers in addition to planned construction. Meanwhile, Trump wants to open up federal land for new developments and he’s pledged to eliminate regulatory red tape that slow building. (Bloomberg)

⏰ Wall Street is limiting hours for junior bankers in a bid to push back on the long-standing culture of overworking. “Limit” is used liberally here, though. JPMorgan is capping young staffers at 80 hours a week, while Bank of America is implementing a new timekeeping tool that asks employees to document how they spend their time. (WSJ)

Rapid-fire:

• Interest payments on the national debt surpassed $1 trillion, up 30% from a year ago (CNBC)

• Wells Fargo stock declined more than 3% after regulators asked the bank to beef up its money-laundering detection systems (Bloomberg)

• Pakistan claims it’s met all requirements to secure a $7 billion loan from the IMF to help prop up its economy (AP)

• Amazon raised wages for its drivers by 7% (Reuters)

• Small-cap stocks are beating the S&P 500 this quarter (MarketWatch)

• OpenAI released a new AI language model called Strawberry that can answer increasingly complex questions (OpenAI Blog)

Podcast:

I sat down with investor Anthony Pompliano, the co-founder of Opening Bell Daily, to discuss Nixon taking the dollar off the gold standard, currency debasement, the Trump-Harris debate, economic policy, and more.

Last thing:

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