The recent Federal Open Market Committee (FOMC) meeting sent a clear message but also stirred uncertainty within the markets. The United States Federal Reserve chose to keep interest rates steady, but this decision was accompanied by an internal division not seen in decades.
For the first time in over 30 years, two members of the Fed voted against the consensus, calling for a rate cut. This reflects rising tension over the direction of US monetary policy and increasing political pressure on Fed Chairman Jerome Powell.
While Powell maintains a cautious stance, awaiting more data before considering rate cuts, US President Donald Trump has intensified his criticisms. The president even went so far as to declare that, if Powell does not cut rates soon, “the Fed board should step in and take control.”
In this context, the tone of the message emerging from Washington has been more political than technical, and its effects are already being felt across Latin America.
Currency values, interest rates, and investment decisions in the region are directly influenced by the Fed’s actions. A prolonged contractionary monetary policy in the United States tends to exert pressure on emerging economies through capital outflows, higher international credit costs, and pressure on local currencies. However, the impact varies from country to country depending on their specific economic conditions.
Argentina
In Argentina, the Fed’s decision was closely followed, but it did not come as a surprise. The decision to keep interest rates high, coupled with the internal fracture at the US institution, generated political and economic reactions locally. As Forbes Argentina points out, the division within the FOMC marks a shift in policy: for the first time in three decades, consensus is fracturing, reflecting the growing doubts within the Fed about how to proceed when economic data offers mixed signals.
Argentina is currently undergoing its own macroeconomic restructuring. The government of Javier Milei needs lower international rates to ease external financing conditions and, eventually, to reactivate investment sources.
The immediate impact of the Fed’s decision is on Argentina’s exchange rate policy. The expectation of high rates in the United States continues to pressure the dollar, and with currency controls still in place for companies, the result is greater domestic exchange rate tensions.
On the financial front, the performance of US Treasury bond yields is being closely watched. Any shift in the Fed’s monetary policy could affect the global appetite for emerging market assets. In countries like Argentina, with limited access to external financing, sustained high rates could create additional challenges.
Mexico
The Fed’s decision to keep rates high and the internal division within the FOMC are reflected in Mexico through the need for a prudent monetary policy, as noted by the Bank of Mexico in its Statement of Account from July 18, 2025.
While inflation has moderated in some sectors, underlying inflation remains high, and the narrowing rate differential between Mexico and the United States has limited the scope for further rate cuts in Mexico. In this environment, Banxico (Mexico’s central bank) is adopting a cautious approach to avoid inflationary pressures and exchange rate volatility, carefully assessing the global economic situation before adjusting its policies.
The Mexican Banking Association (ABM) also highlighted the stability of the country’s banking system despite the external challenges posed by the restrictive US monetary policy. However, it pointed out that the high US rates and the uncertainty resulting from the divided vote in the FOMC are affecting investor caution and credit dynamics, which in turn are creating challenges for financing, investment, and exchange rate stability in Mexico.
Central America and the Caribbean
The monetary policy of the U.S. Federal Reserve has a significant impact on Central America and the Caribbean, where many economies are deeply tied to the United States through trade, foreign investment, and remittances.
Persistently high US interest rates translate into higher borrowing costs, reduced export competitiveness, and increased pressure from imported inflation. Dollarized countries, such as Panama and El Salvador, are especially vulnerable since they lack independent monetary policy tools and therefore have limited capacity to respond to external shocks.
In this context, the region must adopt a dual strategy: reinforcing fiscal discipline to sustain market confidence while leveraging external flows such as tourism and remittances to act as buffers in a tightening global financial environment.
Panama and El Salvador (Dollarized Economies)
These countries, which do not have their own currencies, are directly exposed to the decisions made by the Federal Reserve. Higher US interest rates immediately translate into more expensive loans and reduced domestic investment.
This can slow key economic sectors such as construction and consumption, which are highly reliant on credit. Politically, their governments have limited tools to counter these effects through monetary policy, making them more susceptible to public perception of economic performance.
Instead, they must rely on fiscal and regulatory measures to mitigate the impact. In El Salvador’s case, remittances have become a crucial financial cushion, yet underlying vulnerabilities remain.
Guatemala and the Dominican Republic
In recent years, both countries have achieved greater macroeconomic stability, largely thanks to more autonomous central banks and the use of their own currencies. While US Federal Reserve decisions do have an impact on their domestic policies, they are not the determining factor.
Guatemala and the Dominican Republic have kept inflation and currency levels stable, granting them greater flexibility to adjust policies on their own terms. Politically, both nations are well-placed to attract investment and sustain stability, even in the face of global challenges.
Costa Rica
Although not dollarized, Costa Rica is highly vulnerable to US monetary policy due to its strong links with the dollar in terms of debt, trade, investment, and tourism. High US interest rates raise the cost of external financing and pressure domestic rates, negatively impacting credit and consumption.
The imposition of a 15% tariff by the US on Costa Rican exports exacerbates this by reducing competitiveness and cutting into export revenues. This dual pressure, both monetary and trade-related, weakens Costa Rica’s ability to attract foreign investment, threatening key sectors like manufacturing and tourism, and putting economic growth at risk.
Brazil
Although the Fed’s decision to maintain high interest rates could initially attract foreign investment seeking higher returns, Brazil is facing substantial economic hurdles. The country continues to struggle with inflation that remains above target, and the Central Bank’s high domestic interest rates are hindering short-term economic recovery.
“We don’t need to be subordinated to the dollar in our international trade,” said President Lula, reflecting the government’s broader aim to reduce Brazil’s dependence on the US dollar. This approach is aligned with efforts to explore alternative trade mechanisms that don’t rely on the dollar, particularly in a context where the dollar’s strength is exerting additional pressure on the country’s trade balance.
Sectors such as agribusiness, which relies heavily on imported agricultural inputs, and industry, which depends on foreign machinery, are especially affected by the rising costs driven by the stronger dollar. The increase in import costs not only squeezes profit margins but also threatens the competitiveness of Brazilian products in the global market, as these higher production costs are often passed down to consumers.
Meanwhile, the consumer sector is also feeling the pressure, as higher borrowing costs reduce purchasing power and dampen demand in areas such as retail and automotive. For businesses in Brazil, the environment remains challenging. High interest rates continue to limit access to credit, raising financing costs and slowing investment in critical sectors like infrastructure, technology, and renewable energy.
Colombia
The sharp appreciation of the dollar in Colombia is one of several challenges the country’s economy faces, influenced by international events, political decisions, and global market reactions stemming from high-stakes choices. A key factor driving this volatility is the recent escalation of the tariff dispute, led by US President Donald Trump.
Such a decision could set off a ripple effect, urging other nations to defend their commercial interests, which in turn increases uncertainty globally.
In response, the European Union has unveiled a financial plan aimed at counteracting these tariffs, proposing a 30% counter-tariff if negotiations with the US fail.
Rising trade tensions are ushering in a new wave of protectionism in certain regions, which could deter international investment, particularly in emerging economies like Colombia that heavily rely on foreign trade, the stability of the dollar, and investor confidence.
This shift may have broader implications for global inflation, prompting the Federal Reserve (Fed) to reassess its policies, possibly opting to maintain or raise interest rates. Such a move would make dollar-denominated assets more appealing, further strengthening the US dollar worldwide.
As the dollar rises, Colombia faces higher import costs, which in turn raises expenses for businesses reliant on foreign inputs and increases the cost of living. The Colombian peso now faces a dual challenge: capital outflows to safer markets and heightened investor uncertainty.
Compounding this are internal factors, including moderate economic growth, persistent fiscal concerns, and a political environment that remains unstable. Despite solid macroeconomic fundamentals compared to its regional counterparts, Colombia’s currency remains vulnerable to external pressures, especially those tied to US monetary policy.
Peru
In Peru, the Fed’s decision is likely to have several consequences. One of the key impacts will be on the decision of the Central Reserve Bank of Peru (BCRP) regarding whether to maintain its benchmark interest rate at 4.50% or resume rate cuts. In recent months, the BCRP has generally followed the Fed’s guidance.
Another way in which the decision may affect Peru is through the price of copper, which dropped by almost 20% in one day, affecting export values and the country’s finances, potentially leading to a direct impact on Peru’s economy.
The differential between the Fed’s rate and the BCRP’s rate tends to drive capital outflows and generate depreciation pressures on the Peruvian sol. A rising dollar makes debt more expensive, and while the BCRP has solid international reserves and can intervene to smooth exchange rate volatility, a sustained period of high US rates could reduce the flow of dollar credit to emerging markets.
Chile
The introduction of a 10% tariff by the United States on Chilean goods, effective from 7th August 2025, has created a challenging situation for Chile.
On one hand, there is evident concern within the business community, particularly among leaders in the forestry, agriculture, and fishing sectors, who predict adverse effects on the national economy and are calling for continued negotiations with the Trump administration. However, the Chilean government maintains that the overall impact will be “minimal”, arguing that the 10% tariff is among the lowest ever imposed by the US and, crucially, emphasising the exclusion of copper from the highest tariffs.
Experts and academics broadly agree that the immediate consequences will be limited, with some suggesting that Chile could even gain if other countries face steeper tariffs. Consulting firms such as Oxford Economics and JP Morgan support this view, predicting a “negligible economic effect” from a 50% tariff on copper, alongside a “minimal impact” on inflation and Chile’s broader economic activity.
Nonetheless, specific products such as chicken, fresh grapes, dried and fresh oranges, and rubber tyres may be affected due to competition from Mexico and Canada, which benefit from tariff-free access.
Although Chile’s financial markets have demonstrated strength in absorbing the direct effects of the tariffs, the government cautions that there may be a “greater long-term impact” should these measures continue, emphasising the need for strategic adaptation over time.
Chile’s approach is twofold: maintaining diplomatic relations with the United States in order to secure the complete removal of tariffs while also taking advantage of the existing Free Trade Agreement (FTA) and broadening export markets. Claudia Sanhueza, Undersecretary of International Economic Relations (Subrei), expressed confidence that “continuous dialogue with our counterparts opens up opportunities for agreements beneficial to our sectors.” The possibility of Chile being exempted from the 10% tariff remains on the table, as the country’s FTA with the United States could mirror the agreements that secured exemptions for Mexico and Canada.
Expanding trade partnerships is part of Chile’s strategy to strengthen its economic resilience and reduce dependency on a single market. In April, Agriculture Minister Esteban Valenzuela confirmed that Chile would continue to promote its products in key markets, including China, ASEAN, and Japan, while reinforcing its presence across Latin America.
Indonesia has recently become a new destination for Chilean fruit, with Vietnam, the Philippines, and Thailand set to follow suit. Meanwhile, the mining sector, according to Minister of Mining Aurora Williams, is targeting India, Brazil, and China for the export of copper and other minerals such as lithium, molybdenum, and rhenium.
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