As Jerome Powell confidently takes a deep breath and slashes US interest rates in a bold bid to keep the American economy afloat, emerging markets are watching from the sidelines somewhat enviously. The Federal Reserve’s half-point cut signals that the world’s largest economy is prepared to loosen its monetary grip and let the dollar flow more freely. However, following the Fed’s lead isn’t quite simple for emerging markets.

While Powell proudly proclaims that inflation in the US is down to a “manageable” 2.5%, emerging markets are still stuck with inflation rates that would give any central banker nightmares—double digits in some places. So, while the Fed can ease up and claim victory over inflation, emerging markets are still fighting that fire with a leaky hose. Cutting rates in this environment? That’s like throwing gasoline on the flames.
Sure, Powell can afford to act boldly, knowing that inflation in the US is slowly cooling. But in many emerging markets, inflation remains a wild card—fuelled by everything from volatile commodity prices to erratic currency movements. Lowering rates under these conditions isn’t just risky; it’s downright reckless.

Of course, there’s the small matter of debt. Emerging markets are infamous for carrying hefty loads of foreign currency-denominated debt. And here’s the kicker: cutting rates aggressively would only weaken their currencies further, driving up the cost of servicing this debt. Powell and the Fed might have the luxury of managing their debt dynamics with some wiggle room, but emerging markets? Not so much.
They don’t have the luxury of printing dollars to pay off their debts, and a rate cut now would only push them deeper into a financial hole. It’s the kind of gamble they can’t afford to take.

Let’s remember that Powell’s big rate cut wasn’t without its risks. Slashing rates by half a percentage point—the kind of move usually reserved for economic crises—has sent a message to the markets. Investors now wonder if the Fed knows something the rest of us don’t. Could a downturn be on the horizon? Powell might be betting on a soft landing for the US economy. Still, his aggressive cut will likely ripple through other central banks, forcing them to make tough decisions about their monetary policy.
This is where the real challenge begins for emerging markets. As Powell cuts rates, money could flow back into the safety of the US dollar, leaving emerging markets vulnerable to capital outflows. Investors, ever skittish in times of uncertainty, may well decide that developed economies are a safer bet, pulling their money out of emerging markets when those economies need it most.

A 50-basis-point cut might sound like a celebration for Wall Street, but it’s not necessarily a party everyone else can join. While the US economy might enjoy some relief, the rest of the world—especially emerging markets—faces a far more complex and risky situation.