Dr. Hamad Kasasbeh

Decisions of the U.S. Federal Reserve on interest rates are among the most powerful tools in the global financial system. They affect liquidity, borrowing costs, debt service, capital flows, and exchange rates. For developing economies that peg their currencies to the U.S. dollar, the impact is faster and deeper, given their fragile financial and economic structures.

In recent years, the Federal Reserve adopted a strong tightening cycle, raising rates many times to fight high inflation. However, many reports from major investment banks and financial institutions now expect a series of cuts in the coming period. This outlook was also reinforced by recent remarks from the Fed’s Chairman, who hinted at the possibility of rate reductions. The main goal is to support growth and avoid a deep recession. This raises key questions: how will these cuts affect dollar-pegged developing economies? And what strategies should they follow?

On the financial side, lower rates reduce the burden of servicing dollar-denominated debt. Short- and medium-term debt with variable interest rates becomes cheaper, giving governments space to redirect funds toward development or investment projects. But the effect is limited for long-term fixed-rate debt, which is less sensitive to the current changes.

Yet, the benefits come with risks. Extra liquidity can increase inflation, especially in countries with weak price controls. Lower returns on dollar assets may also push investors to move capital to other markets with better yields. This could cause financial instability and exchange rate volatility.

The trade dimension also matters. This year, U.S. tariffs rose widely and across many imported goods. This has weakened the competitiveness of exports from developing countries, especially those relying on the U.S. market in key industries such as textiles and manufacturing. As a result, financial gains from cheaper borrowing may be offset by the negative effects of continued U.S. protectionist trade policies.

Rate cuts also tend to weaken the U.S. dollar against other currencies. This can boost exports of dollar-pegged economies to non-dollar markets. But at the same time, it makes imports from those markets more expensive, adding new inflationary pressures. Policymakers must balance the relief from lower debt service with the challenge of rising import costs.

Foreign investment is another sensitive area. Lower U.S. rates often increase capital flows into developing markets, especially if they offer higher returns and a stable business environment. This can be an opportunity to attract investment. But such flows may be short-term and volatile. The real challenge is to strengthen long-term foreign direct investment in productive sectors such as industry, renewable energy, and technology, ensuring a lasting impact on growth.

To maximize the benefits, developing economies should follow three steps. First, restructure or repay high-cost debt faster. Second, use the savings to support productive sectors that create jobs and sustainable growth. Third, diversify export markets to reduce reliance on a single destination and protect against sudden policy shifts in global trade.

For Jordan, the Central Bank has long experience in managing such changes in U.S. interest rates. It has proven its ability to balance monetary stability with supporting growth. With close coordination between monetary and fiscal policy, Jordan can turn potential U.S. cuts into a real opportunity to enhance growth, maintain financial stability, and preserve investor confidence.