US Fed may no longer lead the global rate cycle, says Macquarie's Viktor Shvets

This rising protectionism and fragmentation will reshape global trade, capital flows, and inflation dynamics. And that, Shvets argues, is precisely why the Fed can no longer be the global rate-setter it once was.

The era of the US Federal Reserve setting the pace for global interest rates may be nearing its end, Viktor Shvets, global strategist at Macquarie said, adding that the world is entering a far more fragmented and unpredictable phase where inflation and rates may no longer move in sync across nations.

"For decades, the US was exceptional, it had the unique ability to grow labour, capital and productivity all at once, backed by strong institutions, deep liquidity, and the power of the dollar,” Shvets told Moneycontrol on April 30, “But that world is changing."

Historically, US Fed’s decisions have created ripples through the global financial system, shaping rate cycles from Europe to emerging markets. But Shvets said that model is breaking down. "It’s easy to say the system is changing. The real question is - changing to what?"

The challenge is that no single country or currency is ready to take the Fed’s place, and the US dollar still dominates more than 50 percent of global trade transactions, 57 percent of foreign exchange reserves, over 80 percent of forex trading, and 70 percent of non-resident financing. “There’s no alternative—neither the euro, nor the yen, nor the yuan can step in,” said Shvets.

Yet, even with the dollar’s dominance intact, the Fed’s grip on the global rate cycle is weakening because of growing divergences in economic outcomes across countries. “We’re entering a world of elevated risk and greater volatility,” Shvets said, implying inflation and interest rates will no longer be global stories, but will become local themes.

Some economies, he noted, will battle high inflation, while others may slide into stagflation. Still others—like China—could face deepening disinflation, said the Macquarie strategist. “If China can’t export its goods, it will dump them at home, which adds to disinflation. If it dumps them abroad, countries will retaliate with protectionist measures. So, it’s not just the US raising barriers—it’s everyone against everyone,” said Shvets.

This rising protectionism and fragmentation will reshape global trade, capital flows, and inflation dynamics, and that, Shvets argues, is precisely why the US Fed can no longer be the global rate-setter it once was.