The US Federal Reserve Board has decided to retain the benchmark rate for the United States economy within the target range of 3.75 to 4 per cent. Effective rates will average 3.88 per cent. This decision has significant implications for international financial markets, particularly as the US heads to the polls for the mid-term elections on November 3.
The mid-term elections will determine which party, Republicans or Democrats, gains control of both the Congress and the Senate. Opinion polls suggest a decisive win for the Democrats to control the Congress, with a good chance to flip the Senate too. Several gubernatorial seats are also up for grabs. These events in the US have far-reaching consequences for economic policymakers and students of foreign policy.
The US is unique in having full control over its monetary policy. The Impossible Trinity or Trilemma in international finance explains that no country can control its monetary policy, exchange rates, and balance of payments simultaneously. A country can regulate a maximum of two of these macroeconomic variables, leaving the other to market forces. The US controls monetary policy and lets the other two float.
The outcome of the US mid-term elections will be significant not only for Americans but also for the rest of the world. If Democrats take control of both Houses, President Trump's excesses will be curtailed through legislative oversight. Democrats have hinted at initiating investigations into alleged massive corruption at the highest echelons of power in contravention of the law and established traditions.
The Kenyan capital markets have responded to the US mid-term elections signals, reflecting regulatory and corporate policy briefs. In recent months, the domestic economy experienced notable foreign investor outflows and heavy foreign selling pressure due to global macroeconomic pressures, inflation, and shifting bond yields. This development buys the local markets a grace period to adjust to post-US mid-term policy shifts.
Emerging data indicates that foreign currency holdings by wealthy individuals and corporations in Kenya have surged to about Sh1.52 trillion. This points to early shifts in capital allocations to adjust for political risks due to the coming General Election, inflation, and high yields in foreign capital markets. Public debt in Kenya is estimated to be about 70.6 per cent of the Gross Domestic Product (GDP), against the legal and policy target of no more than 55 per cent of the GDP.
The Fed's decision to maintain stability eases capital flight from the domestic economy, ensures continued stability for the shilling, slows down costs of foreign debt service, and legitimises the Monetary Policy Committee rate, retained in its meeting on October 7, 2026. The Kenyan economy will likely benefit from the stable US interest rates, allowing for a more predictable and stable economic environment.
Key points
- The US Federal Reserve Board maintains the benchmark interest rate within the target range of 3.75 to 4 per cent.
- The outcome of the US mid-term elections will have significant implications for global economic policies.
- Kenyan capital markets respond to US mid-term elections signals, reflecting regulatory and corporate policy briefs.
