Emerging markets give clues to Fed rate cut timing

Emerging markets (EM) began to experience the post-Covid rise in inflation around six to nine months ahead of developed markets. That inflation in EM then started to fall in the second quarter of 2022 - also around six to nine months ahead of Europe and North America.

This edition of Chart Room shows, a similar story has played out with central bank policy rates. Brazil, Chile, Hungary, and Poland - along with Peru and Uruguay - all started hiking interest rates earlier than the US Federal Reserve (Fed) and European Central Bank. Again, there was a lag of around six to nine months before the Fed’s first hike. That’s why the US interest rate line on the chart is shorter than those for EM interest rates, with the Euro Area’s shorter again.

With inflation less rampant than it was, these same emerging market central banks began to cut rates this summer. Now, there’s no such thing as a crystal ball for investing. Each of these economies has its own fiscal, monetary, and exchange rate considerations. But for the most part, business cycles, inflation, and the effects of monetary policy tend to work the same way across economies. This is one reason the chart shows such a clear lead-lag pattern. If this pattern holds, it suggests the Fed will start cutting rates next March or April.