Whether intentional or unintentional, the economic decisions made by the American government inevitably have an impact on global stock markets and economic systems. What’s more, the economic policies set forth by the United States trickle down to create an effect throughout the entire world—all within one swift move. It is no exaggeration to say that the US economic policies determine the future of entire nations, depending on how the Middle East, Europe, and Asia perceive the actions of the US. To explore just how much influence US economic policies have on the world economy, here is an in-depth look at the market’s immediate reaction to the US and how global stock markets and economic systems have been affected.
Understanding the US Economy and Policies
The US economy is based on free market principles, meaning it allows businesses to buy and sell goods and services in an open market where supply and demand determine the prices of goods, services, and wages. The US government seeks to further create an environment where businesses are bullish and said businesses can increase the value of the country’s currency, stocks, and trades. It should come as no surprise then that the economic policies set forth by the United States have a direct influence on the value of the US dollar and ultimately, global stock markets.
The Federal Reserve’s Influence on Inflation
The Federal Reserve, or the Fed, is crucial when it comes to impacting the US economy. The Federal Reserve is a central bank that is responsible for setting interest rates and controlling the rate of inflation. By adjusting the nation’s monetary policy, the Federal Reserve can affect the value of the US dollar, thus, impacting global markets.
When the Fed raises or lowers interest rates, for example, businesses respond accordingly. This affects the circulation of money and can result in an appreciation or depreciation in the value of the US dollar. When the US dollar is strong and companies are eager to invest in it, they are likely to look abroad to trade and make profits, as well. This, in turn, impacts the foreign exchange markets, while also influencing global stock markets and economic stagnation.
Tax Cuts and Tariffs
US tax cuts and tariffs also have an impact on global markets. When the US government reduces taxes, businesses benefit, as they can save money, take more risks, and invest in the US markets. This, in turn, creates higher salaries for businesses, allowing them to pay their workers more, and stimulating the US job market. When employees receive a raise, they tend to spend more and invest in the markets, thus, leading to an increase in stocks and economic growth.
The impact of tax cuts may be global, as they can lead to other countries lowering taxes as well. This could potentially affect the global economy, as companies have more money to invest internationally, giving them more leverage to participate in export and foreign investments.
Additionally, US tariffs can have an impact on global markets. Tariffs are taxes collected by customs when goods are imported or exported from one country to another. When the US imposes tariffs on goods imported or exported from certain countries, global stock markets may respond accordingly.
The Impact of Trade
The United States’ trade policies also influence global markets. For instance, when the US enters into a trade deal with another country, it can have a tremendous effect on that country’s economic growth. Participation in trade agreements and negotiations can open up new markets and increase investment opportunities in a particular country, which can lead to higher demand for goods and services domestically and globally.
When the US decides to withdraw from trade agreements or impose import tariffs, this can often have a negative impact on global markets. This is because US withdrawal from trade agreements or imposition of import duties could slow down global trade. As the US is a major player in the global market and is home to some of the largest companies in the world, it is no surprise that the US’ withdrawal from agreements or imposition of tariffs could potentially have a domino effect in the global markets, as well.
The US Federal Budget
The US federal budget also has an impact on global markets. When the US allocates more money to its citizens and businesses, it has a positive effect on the US economic system and can lead to an increase in consumer spending and investments. Higher consumer spending and investments can lead to economic growth and stock market gains.
Additionally, when the US government decides to cut back on its spending, it can lead to a decrease in consumer spending and investments. This can, of course, lead to a decrease in the value of stocks and a slower rate of economic growth.
The Impact of US Economic Policies on Global Markets
The economic policies set forth by the United States evidently have an influence on the entire world’s economic system. Tax cuts and tariffs, trade agreements and withdrawn agreements, the value of the US dollar, and the US federal budget all have the potential to have a direct impact on global stock markets and economic growth. As the US government makes decisions on fiscal policy and trade, it is important to keep in mind that the US economy is inextricably linked to the global market—with a strong US economy leading to a strong global economy, too.
