Investment School: Why US Federal Reserve Bank decisions matter to investors

The influence of the US Federal Reserve continues to ripple through every major economy, including South Africa’s, because the dollar remains the world’s reserve currency and the Fed’s interest rate decisions set the benchmark for global borrowing costs.

Analysts say the Fed’s rate moves shape everything from government bond pricing to the valuation of companies on the JSE.

Chantal Marx, Head of Equity Research at FNB Wealth and Investments, noted that although the South African Reserve Bank (SARB) focuses first on domestic inflation and growth, it cannot ignore the Fed.

She added that cutting rates locally while the Fed holds steady would likely weaken the rand, push up inflation, and force the SARB to reverse course.

“The US dollar is the world’s currency reserve, and the Fed’s decision can affect the value of the dollar and therefore impact almost every asset in the world."

Asanda Notshe, Chief Investment Officer at Mazi Asset Management, stated that shifts in US interest rates also influence the “carry trade,” where investors move money acrossborders to chase better returns, amplifying volatility.

He warned that political pressure on the Fed, especially if a US administration pushes for premature rate cuts, creates uncertainty that financial markets struggle to price.

"It's a really tricky thing when other factors do get introduced because it does remove that element of one being able to sort of look at the data and predict where things and interest rates are likely to go and the decisions the Fed is going to take."

The Federal Reserve will announce its interest rate decision on Wednesday, with many economists predicting a 25-basis point cut.

To listen to Chantal Marx and Asanda Notshe in conversation with 702 and CapeTalk's Stephen Grootes, click the audio below: