Market expectations are increasingly aligned around the prospect of an imminent US Federal Reserve rate cut, even as policymakers signal caution in their forward guidance. Investment professionals say a reduction in interest rates is now widely anticipated, but warn that the Fed’s communication strategy may remain deliberately hawkish, limiting the longer-term impact on global markets, including emerging economies such as Nigeria.
Arnold Dublin-Green, Chief Investment Officer at Cordros Asset Management, said the odds of the Federal Reserve holding rates steady at upcoming meetings appear slim, given prevailing economic conditions. According to him, current data does not present a compelling case for the central bank to delay easing.
“I think I’ll be surprised if they don’t cut. I don’t think there is anything that would require them not to,” he said. However, Dublin-Green cautioned that while a rate cut may occur, the tone adopted by Fed Chair Jerome Powell could remain conservative, a phenomenon increasingly referred to in markets as a “hawkish cut.”
He explained that such an approach would involve lowering rates while maintaining cautious rhetoric, signalling that policymakers remain vigilant about inflation risks and are not yet committing to an aggressive easing cycle. Markets, he noted, are currently pricing in between two and four rate cuts over the next year, but the Fed may prefer to move incrementally, guided by incoming inflation and labour market data rather than market expectations.
Short-term relief, long-term uncertainty
While a rate cut could offer temporary relief to global financial markets, some analysts are less optimistic about the longer-term trajectory of US interest rates. Ahmad Zuaiter, founder of Jadara Capital Partners, warned that inflationary pressures could re-emerge in the United States within the next 12 to 24 months, potentially reversing any easing gains.
“I think they’ll probably cut next year,” Zuaiter said. “But I’m actually quite bearish on rates over the one- to two-year horizon. I think inflation will be a big problem a year out in the US.”
He attributed potential inflation risks to a combination of weak regulatory oversight, the persistence of tariffs, and a weakening US dollar. In his view, these factors could push US rates higher again, potentially by as much as 100 to 200 basis points over the next two years, undermining the sustainability of any near-term accommodative stance.
Nigeria’s FX stability seen as reform-led
Turning to Nigeria, Zuaiter argued that recent improvements in exchange rate stability have been driven more by domestic policy reforms than by external factors such as dollar weakness. According to him, investor sentiment towards the naira has improved as reforms have enhanced transparency and restored confidence.
“It’s primarily reform-driven,” he said. “Investors are choosing to buy the naira. You are now comfortably in a positive real rate profile.”
He added that the naira remains significantly undervalued, despite recent gains, giving policymakers room to maintain reform momentum. At its weakest levels earlier in the year, the currency overshot its fair value, he said.
“When the naira touched N1,750 to N1,800, you really overshot,” Zuaiter noted, estimating that the currency is still “anywhere from 30 to 40 per cent cheap.”
CBN’s cautious stance gains support
Zuaiter also defended the Central Bank of Nigeria’s conservative approach to interest rates, arguing that the focus on structural disinflation is appropriate in the current environment. According to him, premature easing could undermine recent progress on price stability and investor confidence.
“They want to be conservative and make sure that inflation structurally is starting to come down,” he said, adding that interest rate changes alone may not dramatically alter liquidity conditions.
“What really changes is that the currency is undervalued, in the perception of Nigerians and foreigners,” he added, emphasizing that credibility and confidence are critical to sustaining FX stability.
Implications for Nigeria’s policy direction
Analysts say Nigeria’s monetary authorities will need to closely track developments in the US as they calibrate policy choices around interest rates, capital flows, and exchange rate management. A Fed rate cut could ease pressure on the naira by improving global risk appetite and supporting foreign portfolio inflows into Nigerian assets.
However, they caution that lingering inflation risks in advanced economies, coupled with political uncertainty in the US, could limit the magnitude and duration of these benefits. For Nigeria, this means reforms and domestic policy discipline are likely to remain more important than external tailwinds.
What you should know
Federal Reserve Chair Jerome Powell has only three policy meetings remaining before his term ends in May, adding an additional layer of uncertainty to the outlook for US monetary policy. Markets are already speculating on how a new Fed chair might reshape policy priorities.
Financial markets are currently pricing in lower future interest rates than those projected by many Fed officials, partly reflecting expectations that a nominee aligned with President Donald Trump could favour more accommodative monetary conditions.
As a result, while a Fed rate cut appears increasingly likely, the broader trajectory of global interest rates remains uncertain, reinforcing the need for cautious positioning by investors and policymakers alike.
Emmanuel Bassey is a Financial Expert that has worked in the Banking and Finance Industry for over 15+ years across different banks in Nigeria
