Fed caution signals slow rate cuts for emerging markets

Federal Reserve officials are expected to maintain interest rates steady today, giving themselves more time to combat inflation and evaluate the impact of President Donald Trump's policies on the economy. Elijah Oliveros-Rosen, Chief Emerging Markets Economist at S&P Global Ratings, shared his insights on CNBC Africa about the Fed's expectations and the implications for emerging markets. Oliveros-Rosen highlighted the robust nature of the U.S. economy, with GDP and employment data surpassing expectations. The uncertain inflation outlook has set the stage for the Fed's imminent decision. Currently, there are projections for moderate rate cuts in 2025 compared to previous forecasts. Market expectancies indicate at least one 25 basis points cut, emphasizing caution in the face of trade and fiscal policy uncertainties. Amidst these circumstances, emerging market central banks are advised to adopt a cautious approach to prevent a destabilization of capital flows and currency devaluation. Oliveros-Rosen pinpointed countries such as Brazil and Colombia as having vulnerable fiscal situations that could heighten risks in the wake of U.S. interest rate changes. Turning to South Africa, where the inflation outlook has improved, the South African Reserve Bank is anticipated to pursue a gradual rate adjustment in response to global economic uncertainties. While expectations suggest a 25 basis points cut, a total reduction of 50 points is foreseeable in alignment with the Fed's decisions. The likelihood of a hawkish stance by Fed Chair Jerome Powell could sway reactions in emerging markets, including South Africa. However, maintaining neutrality remains paramount for these financial institutions. South African policy expectations are underlined by the expectation of sustained low inflation and a potential rate cut. Inflation projections for South Africa are poised to remain around the 3% mark in the first half of the year, before a slight uptick in the latter months. The prevailing consensus is that the South African Central Bank is unlikely to pivot towards rate hikes but instead may continue its gradual easing. Market sentiments, while hinting at possible rate hikes later in the year, are primarily contingent on policy decisions and inflationary pressures. The pivotal risks lie in unforeseen policy changes that could alter the current trajectory of interest rate adjustments. Thus, vigilance and adaptability are emphasized to navigate the ever-evolving economic landscape.Upon concluding the discussion, Olivia thanked Elijah for his insights on the economic dynamics and anticipated further updates on the evolving economic scenarios in South Africa and the United States.