Opinion | Why the Fed credibility crisis will hit emerging markets harder

This reassessment – marked by quiet “sell America” trades – is beginning to surface.

The damage extends far beyond Washington. It creates long-term risks to inflation trajectories and could push the global financial system towards greater fragmentation and inefficiency, leaving emerging markets and developing economies in Asia, Latin America and Africa most exposed. To be sure, these consequences stem from multiple factors, but doubts over the Fed’s independence are undoubtedly one of the key drivers.

The most revealing signal of this reassessment is visible in official reserve behaviour. Central banks and global investors have increased their exposure to traditional safe havens, with gold

emerging as a primary beneficiary. By the third quarter of 2025, gold accounted for close to 30 per cent of global official reserves. As the world’s second-largest reserve asset, its share advantage over the euro has widened.

Yet the renewed accumulation of gold also carries macroeconomic trade-offs. Unlike reserve currencies, gold does not provide liquidity backstops or support crisis-era funding mechanisms. When more global savings flow into non-yielding assets, the international financial system becomes less flexible to shocks over time. A widespread flight to safety may undermine the efficiency of capital allocation and weaken the resilience of the global financial system.

These effects weigh heavily on emerging markets. Constrained by shallow financial markets and lower gold shares in official reserves, emerging markets have experienced a dual shift towards gold for private investors and central banks.