By Muhammad Zulqarnain

Persistent inflation in the United States is clouding the Federal Reserve's rate-cut outlook, with economists warning that prolonged high US interest rates could tighten global financial conditions and weigh on emerging economies.

According to the latest US inflation data, the Consumer Price Index (CPI) rose 3.5% year-on-year in June, remaining well above the Federal Reserve's 2% target. Sticky inflation, driven by elevated energy prices, supply-side disruptions and geopolitical uncertainties, has prompted the US central bank to maintain a cautious monetary stance, keeping interest rates in the 3.50% to 3.75% range.

Economists believe that an extended period of elevated US interest rates could strengthen the US dollar, tighten global liquidity and reduce capital flows to emerging markets, making economic recovery more challenging for countries dependent on external financing and trade.

They believe that while several emerging economies have made progress in restoring macroeconomic stability, persistent US inflation and delayed Federal Reserve rate cuts reinforce the need for continued fiscal discipline, structural reforms and prudent monetary policies to withstand a prolonged period of elevated global interest rates.

Speaking to Wealth Pakistan, Tuaha Adil, Research Economist at the Policy Research Institute of Market Economy (PRIME), said persistent inflation in the United States and the delay in Federal Reserve interest rate cuts could result from a combination of domestic fiscal challenges, elevated defence spending, tariff-related uncertainties, supply chain disruptions and rising energy prices linked to ongoing geopolitical tensions.

He noted that higher living and business costs in the United States could weaken consumer purchasing power, potentially reducing demand for imports from trading partners.

"The US is Pakistan's largest export destination, and textiles -- our principal export to the American market -- are highly price-sensitive," he said, adding that weaker consumer spending in the United States could adversely affect Pakistan's export earnings.

Adil further said elevated US interest rates were likely to make American financial assets more attractive to investors seeking safer and more stable returns. By contrast, despite relatively high interest rates in Pakistan, economic uncertainty and perceived risks could limit the country's appeal to foreign investors.

Commenting on Pakistan's economic outlook, he said he remained cautious about the country's short-term growth prospects.

He emphasized that longstanding structural weaknesses, governance challenges, rising security concerns and increasing provincial tensions continued to weigh on Pakistan's economic trajectory, making it more vulnerable to prolonged global financial tightening.

Meanwhile, Samina Majeed, Financial Analyst at BMA Investment Advisor Limited, said the Federal Reserve's decision to keep interest rates between 3.50% and 3.75% amid persistent US inflation was likely to maintain pressure on emerging economies by supporting a stronger US dollar and tighter global financial conditions.

She said countries such as Pakistan should prioritize practical measures, including strengthening foreign exchange reserves through concessional financing rather than costly commercial borrowing, allowing exchange rates to adjust in line with market fundamentals, and maintaining a consistent monetary policy stance to prevent inflation expectations from becoming unanchored.

She also emphasized the need to boost exports and remittance inflows to enhance dollar earnings.

"Fiscal discipline is more important than ever," she said, adding that in an environment of tight global credit conditions, any fiscal slippage could significantly undermine investor confidence.

Credit: INP-WealthPk