Vietnam prepares as Fed closer to cutting interest rates

The belief among market players is growing that the Fed will begin reducing its benchmark interest rate in September as officials have sent the strongest signals to cut interest rates. Chairman Jerome Powell said on July 15 that the agency will not wait until inflation falls back to 2 per cent to cut interest rates.

CNBC on July 17 quoted that traders are now nearly 100 per cent certain the Fed will cut interest rates by September according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

Economic expert Dr. Le Dang Doanh assessed that the interest rate reduction aims to stimulate the growth of the US economy, an important factor in the US president's re-election campaign. However, a decrease in interest rates could also lead to a depreciation of the USD and pose challenges to Vietnam’s exports.

“Reduced global trade demand due to the impact of the Fed’s interest rate reduction and the US-China trade war may cause Vietnam’s export activities to face many difficulties,” warned Doanh.

Tran Thanh Hai, deputy director-general of the Ministry of Industry and Trade’s Agency of Foreign Trade, explained that Vietnam does trade around the world mainly in USD, so when the USD depreciates compared to most major currencies globally, the price of imported goods in USD will also be cheaper, thus encourages imports.

“But on the contrary, exporting Vietnamese goods to other countries will face difficulties due to lack of price competitiveness. This leads to increased imports, decreased exports, increased trade deficit, and put pressure on the trade balance,” Hai said.

Although Vietnam is among the top export markets to the United States, it only accounts for about 3 per cent of the country’s total imports. In the first six months of 2024, Vietnam’s export turnover hit $190 billion, up 14.5 per cent over the same period last year.

Among that, the US continues to be the country’s largest export market with an estimated turnover of $54.3 billion, accounting for 28.6 per cent of the country’s total export turnover and increasing by 22.1 per cent over the same corresponding period last year, following the Chinese market, the EU, and South Korea.

“Along with unpredictable inflation and economic developments that have led to the prospect of lowering interest rates by the Fed, the world and regional situation continues to evolve rapidly, causing difficulties for business operations in the last several months of the year,” Hai added.

At the Summer Economic Roundtable 2024 last week, Vu Duc Giang, chairman of the Vietnam Textile and Apparel Association, said that the US moves to cut interest rates will create a burden for exporters.

“Global consumption has not increased in the six months of the year, making exporters increase competition in the context of a potential interest rate cut,” he said. “Exporters are trying to maintain production, instead of benefiting.”

Federal Reserve Chair Jerome Powell said Monday that recent data boosts the central bank's confidence that inflation is coming down towards its two percent target -- a trend that signals interest rate cuts on the horizon.

The global economy is awaiting moves from the US Federal Reserve to cut interest rates. Nguyen Tri Hieu, senior financial expert, shared with VIR’s Nhue Man implications of eminent global standing on Vietnam’s economy and weighing efficient channels for investment in the rest of 2024.