Fed Cuts, AI Distortions, and a Firm Rand

The Federal Reserve delivered its first rate cut of 2025, trimming 25 bps as labour data softened and prior payrolls were sharply revised lower. While inflation remains above target, the Fed’s guidance points to a data-dependent path with markets pricing further easing. A minority FOMC member favoured a larger move and more cuts, underscoring divergence inside the committee.

Attention now turns to the PCE deflator. Expectations are for a mild uptick as tariffs filter through and consumer demand remains resilient. Policymakers face a complex backdrop: AI-driven productivity may allow output to hold up even as layoffs rise, complicating standard reads of slack and inflation. Excess household savings that supported spending post-COVID have largely run down, raising questions about the next demand driver.

In South Africa, the SARB kept rates on hold. The decision, combined with firm commodity prices and a favourable interest-rate differential, supported the rand. Notably, the dollar firmed after the Fed cut against major peers, yet USD/ZAR held its ground; ZAR crosses improved as gold, platinum and palladium advanced while oil was steady.

Baseline guidance is for a stable rand in a tight band near 17.25–17.50 this week, with carry and terms of trade supportive. The team cautions that underlying risks—US inflation surprises, tariff outcomes, geopolitical flare-ups, or equity-market stress—could quickly shift sentiment. For now, importers remain favoured by stability and pricing, but vigilance is warranted.