Why the Fed credibility crisis will hit emerging markets harder

Political pressure on the US Federal Reserve is creating a global credibility crisis with significant implications, particularly for emerging markets. Experts warn that eroding confidence in the Fed's independence through political influence could lead to long-term inflation risks and a more fragmented, inefficient global financial system. This reassessment is evident in central banks and global investors increasing their exposure to safe havens like gold, which now accounts for nearly 30% of global official reserves. While gold accumulation offers safety, it reduces liquidity and flexibility in the international financial system, making it less resilient to shocks. Emerging markets, constrained by shallow financial markets and lower gold reserves, are especially vulnerable to these effects as both private investors and central banks shift towards gold.

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