US Federal Reserve: Its Role and Impact on the Saudi Market 2024-2025

The US Federal Reserve is the central bank of the United States, officially known as the Federal Reserve System (Fed). Established in 1913 under the Federal Reserve Act, it was created in response to a series of financial crises that highlighted the need for a central authority to manage monetary policy and protect the banking system from collapses. The system consists of a Board of Governors in Washington, D.C., made up of seven members appointed by the US president and confirmed by the Senate, along with 12 regional reserve banks located in major cities across the country.

The Fed plays a pivotal role in the US and global economy through three main functions: managing monetary policy to ensure price stability, supervising banks and financial institutions, and providing financial services to the US government and commercial banks. Internationally, the Fed's global role stems from the strength of the US dollar as a primary reserve currency, with dollar reserves accounting for over 60% of global reserves. This gives the Fed indirect authority over capital flows and interest rates in global markets, including emerging markets like Saudi Arabia.

As the global economy has evolved, the Fed has become a key player in addressing financial crises such as the Great Depression in the 1930s, the mortgage crisis in 2008, and the COVID-19 pandemic in 2020. Each time, the Fed resorted to innovative tools, such as quantitative easing and asset purchases, to ensure market stability and inject liquidity when needed. These tools have made the Fed's decisions the focus of attention for investors and governments worldwide, as any change in its monetary policy can lead to shifts in interest rates, capital flows, and currency fluctuations. This dual role—local and global—explains why investors in Saudi Arabia closely monitor every decision or statement issued by the US Federal Reserve.

The US Federal Reserve System is characterized by its complex structure that balances centralization with regional independence. At the heart of this system is the Board of Governors, composed of seven members appointed by the US president for 14-year terms, with the possibility of appointing a chair and vice-chair for specified terms. The Board of Governors sets the general policies for overseeing the financial system and supervises the formulation of US monetary policy.

In addition to the central board, there are 12 regional reserve banks, distributed in major cities such as New York, Chicago, and San Francisco. Each bank is managed by a local board of directors consisting of representatives from commercial banks, local industries, and the public. These regional banks play executive and regulatory roles, such as monitoring local banks, providing emergency loans, and managing payment and settlement operations. They also contribute to the collection and analysis of regional economic data that feed into the central decision-making process.

One of the most notable features of the Fed's organizational structure is the Federal Open Market Committee (FOMC), which includes members of the Board of Governors and the presidents of the regional reserve banks (five of whom vote at each meeting on a rotating basis, with the president of the New York Fed holding a permanent vote). The committee meets eight times a year to determine the core monetary policy, particularly the target interest rates and the policy for buying and selling government bonds.

This structure aims to achieve a balance between national and local interests and ensure the flexibility of the monetary system in the face of rapid economic changes. It also grants sufficient independence to the Fed to make monetary decisions free from short-term political pressures while maintaining accountability to Congress and the public. In the global context, the Fed's independence is viewed as a key factor in the stability of the US dollar and, consequently, in the stability of the global economy, including its impact on dollar-linked economies like Saudi Arabia.

The monetary policy of the US Federal Reserve represents the framework through which the central bank controls the money supply and interest rates to achieve its primary goals: price stability, maximum employment, and ensuring financial system stability. The Fed uses several tools to achieve these objectives, the most prominent of which are setting the federal funds rate (the interest rate on overnight loans between banks), open market operations (buying and selling government securities), and determining reserve requirements for commercial banks.

Raising or lowering the interest rate is the most important and well-known tool. When the Fed raises the interest rate, the cost of borrowing increases for banks, companies, and individuals, often leading to reduced spending and investment, thereby curbing inflation. Conversely, lowering the interest rate makes borrowing cheaper and stimulates consumer and investment spending, supporting economic growth. Open market operations allow the Fed to directly influence liquidity in the banking system; when the Fed buys government securities, it injects money into the market, while selling them withdraws liquidity.

In recent years, especially following the 2008 financial crisis and the COVID-19 pandemic, the Fed has added unconventional tools, such as quantitative easing programs that involved purchasing large quantities of financial assets to provide liquidity and support markets. The Fed has also used forward guidance to influence market expectations regarding the future path of monetary policy.

In 2024 and 2025, the Fed focused on maintaining interest rates at elevated levels (5.25%–5.50%) to control inflation, which rose above its target level following the COVID-19 pandemic. This monetary tightening directly affected borrowing costs worldwide, especially in dollar-linked economies, leading to significant shifts in global equity and bond markets. Understanding the mechanisms of the Fed's monetary policy is essential for anyone dealing with financial markets, especially in Saudi Arabia, where local policies are closely linked to Fed decisions.

The Federal Open Market Committee (FOMC) is the main executive body for monetary decision-making in the United States, and its meetings and announcements are among the most closely monitored events in global markets. The committee consists of 12 members: seven from the Board of Governors, the president of the New York Federal Reserve, and four from the presidents of the regional reserve banks (who rotate among themselves).

The committee holds eight scheduled meetings annually, with additional meetings possible if necessary. At each meeting, the committee reviews macroeconomic indicators: inflation (Consumer Price Index), unemployment, economic growth (GDP), and market expectations. Based on this data, the committee decides whether to raise, lower, or maintain the federal funds rate, in addition to asset purchase or sale policies.

The committee's decisions not only affect the US economy but also extend their impact to global markets. When the committee announces an interest rate hike, it immediately reflects on currency, bond, and equity markets worldwide. In Saudi Arabia, investors and the Saudi central bank closely monitor the outcomes of FOMC meetings, as any change in US interest rates typically requires an immediate adjustment in local interest rates to ensure the stability of the riyal against the dollar.

The importance of the committee also stems from what is known as forward guidance, where it issues statements and forecasts about the future path of monetary policy, helping markets prepare for potential changes. In recent years, with rising inflation rates following the COVID-19 pandemic, the committee has focused on keeping monetary policy tight until inflation returns to targeted levels (2%). These trends have had a direct impact on global capital flows, debt costs, and the attractiveness of investment in emerging markets, including the Saudi financial market.

The Federal Funds Rate is the most influential tool in monetary policy, determining the cost of overnight borrowing between US banks. This rate serves as a benchmark for interest rates worldwide and has a direct impact on mortgage loans, commercial financing, personal loans, as well as exchange rates and international capital flows.

By the end of 2023, the Fed raised the interest rate to a range of 5.25%–5.50%, the highest level in nearly 20 years. This increase was a response to inflation rates exceeding 8% in the US during 2022, with continued inflationary pressures into 2023. During the first half of 2024, the Fed kept the interest rate unchanged, justifying this by stating that inflation had begun to slow but remained above the target level (2%). This stabilization was part of a cautious strategy, as the Fed closely monitored developments in the US and global economies.

By early 2025, markets began to anticipate that the Fed would gradually lower rates if inflation continued to decline and approached the desired target. Some analysts predicted that the first cut would be a quarter-point reduction in the second or third quarter of 2025, provided that unemployment and economic growth remained stable.

The impact of these moves is not limited to the US alone but extends to many countries that peg their currencies to the dollar, such as Saudi Arabia. When the Fed raises rates, the Saudi central bank is compelled to raise local interest rates, which reflects on the cost of financing for individuals and companies, affecting the stock market, real estate, and consumer lending. Therefore, monitoring developments in the Fed's interest rate is vital for understanding the investment climate in Saudi Arabia and the region.

Inflation and the US labor market are the two primary factors on which the US Federal Reserve bases its monetary policy decisions. Following the COVID-19 pandemic, the US experienced unprecedented inflation, with the Core Consumer Price Index (CPI) rising to levels exceeding 8% annually in 2022. This was due to strong demand following the reopening of the economy, supply chain disruptions, and rising energy and food prices.

As the Fed began raising interest rates in 2022, inflation started to gradually decline. By the end of 2024, US inflation averaged around 3.5%, a notable decrease but still above the official target of 2%. The Fed continued to monitor price developments closely, focusing on core inflation components such as housing and services, which showed resistance to rapid declines.

Regarding the labor market, the US unemployment rate remained stable in the range of 3.5%–3.7% throughout 2024, reflecting strong demand for labor. This stability in the labor market provided the Fed with room to continue its tightening monetary policy, as there were no signs of a sharp economic slowdown or significant increases in unemployment. However, the challenge remains to balance reducing inflation while maintaining a strong labor market.

The implications of these indicators on the Fed's decisions are clear: if inflation continues to decline while unemployment remains low, the Fed may begin to gradually ease monetary policy in 2025. Conversely, if inflation rises again or signs of a significant slowdown in the labor market emerge, the Fed may be forced to maintain or even raise rates again. These variables directly affect global markets, especially those linked to the dollar like Saudi Arabia, where local policymakers must closely monitor US inflation and unemployment indicators to determine the direction of local monetary policy.

For several decades, the Saudi riyal has been pegged to a fixed exchange rate against the US dollar (currently at 3.75 riyals per dollar), which makes Saudi monetary policy largely dependent on the US Federal Reserve's policies. This peg aims to achieve currency stability and enhance confidence in the Saudi economy, especially since oil, the main commodity in the Saudi economy, is priced in dollars globally.

As a result of this linkage, when the Fed raises or lowers interest rates, the Saudi central bank (Saudi Arabian Monetary Authority, "SAMA") must adjust local interest rates accordingly to maintain the riyal's attractiveness and ensure that there are no pressures on foreign exchange reserves. In 2024, as the Fed continued to maintain interest rates at high levels (5.25%–5.50%), SAMA raised local lending and deposit rates to around 5.5% to maintain exchange rate stability.

This linkage directly impacts the cost of financing in Saudi Arabia. When US rates rise, the cost of bank loans for Saudi consumers and companies increases, which may lead to a decline in mortgage and consumer lending and slow down some investments. Conversely, when the Fed lowers rates, loans become cheaper, and local economic activity increases.

The effects are not limited to credit alone but extend to capital flows. Rising US rates may prompt some investors to shift their funds to the US dollar in search of higher returns, which may reduce liquidity in emerging markets like Saudi Arabia. In cases of monetary easing, global liquidity may flow into emerging markets, supporting local growth and investment. For this reason, Saudi decision-makers and investors closely monitor the US Federal Reserve's movements and prepare to adjust financial and monetary policies accordingly.

The policies of the US Federal Reserve leave a clear mark on the Saudi financial market due to the riyal's peg to the dollar and the impact of interest rates on the cost of financing and investment. When the Fed raises interest rates, the cost of borrowing for Saudi banks and companies increases, often leading to a decline in mortgage and consumer lending, affecting the growth of sectors reliant on financing such as real estate, construction, and automobiles.

In the Saudi stock market (Tadawul), US monetary tightening policies typically lead to reduced liquidity, as financing becomes more expensive and some capital tends to shift towards safe assets like high-yield US bonds. This can sometimes lead to fluctuations in Saudi stock prices, especially in sectors sensitive to financing costs such as industry and real estate. Conversely, in cases of monetary easing or US rate cuts, the attractiveness of Saudi stocks increases for local and foreign investors seeking higher returns, supporting price increases and increased trading activity.

In 2024-2025, as the Fed continued its tight monetary policy, Saudi investors observed an increase in financing costs and a relative decline in risk appetite, especially with reduced foreign liquidity in the Saudi market in early 2025. However, local liquidity and government spending on infrastructure projects partially offset this effect, keeping the overall market index (TASI) stable above 12,000 points for most of 2024.

Fed policies also influence global investors' decisions regarding investments in emerging markets, as rising US rates increase the attractiveness of bonds and the dollar, while lowering them redirects some flows back to Saudi stocks and real estate. For this reason, monitoring Fed decisions and analyzing their impact is an essential part of investment strategies and risk management in the Saudi financial market.

The Saudi cement sector is one of the most affected by global monetary policies, especially the Fed's decisions regarding interest rates. The cement sector heavily relies on bank financing to implement infrastructure projects and industrial expansion, and the demand for its products is directly linked to the activity level in the real estate sector and large government projects.

In 2024, as the Fed continued to maintain high interest rates, the cost of financing for Saudi companies, including cement companies, increased. This was reflected in a relative decline in mortgage lending growth and a decrease in some private construction projects, despite continued government spending on Vision 2030 projects. For Hail Cement (Tadawul: 3001), demand for its products fluctuated, with its stock price stabilizing in the range of 20–25 riyals during 2024-2025, with a slight upward trend due to ongoing construction demand in housing and infrastructure projects.

Profit margins in the sector were affected by rising energy and raw material prices, especially with the increase in global oil and coal prices. However, companies like Hail Cement managed to maintain good operating profit margins (15–20%) due to operational efficiency improvements and cost management. The company also maintained a stable cash dividend distribution policy, distributing about 0.80 riyals per share in 2024 (approximately 4%).

On the other hand, the sector faced strong competition among major companies, with a focus on improving production capacity and expanding markets, especially as the government sought to accelerate housing and new city projects. Despite the challenges posed by Fed policies, local demand for cement remained relatively high, allowing major companies to maintain stable financial performance and provide consistent returns to shareholders.

The Saudi economy witnessed a series of significant changes in 2024-2025, driven by global and local monetary policies. In terms of inflation, the annual inflation rate in Saudi Arabia ranged between 2–4% during 2024, a relatively moderate rate thanks to policies supporting essential goods and the stability of energy prices locally. This level of inflation occurred amid ongoing global pressures on food and energy prices but remained under control compared to many other emerging economies.

Regarding interest rates, the Saudi Arabian Monetary Authority (SAMA) raised benchmark interest rates in line with the US Federal Reserve's decisions, reaching around 5.5% by mid-2024. This increase aimed to maintain exchange rate stability and support confidence in the Saudi riyal. These policies reflected on financing costs, as lending rates between banks rose, and the growth of mortgage and consumer loans slowed significantly.

In the Saudi stock market (Tadawul), strong activity continued, driven by local liquidity and major national economic projects. The overall market index (TASI) surpassed 12,000 points for most of 2024, with strong performance from major companies in sectors such as construction, basic materials, and energy. Despite some fluctuations resulting from the exit of foreign liquidity due to rising US rates, government spending on infrastructure projects and housing programs kept local demand strong.

These indicators reflect the resilience of the Saudi economy in the face of global challenges and its ability to benefit from its dollar peg in stabilizing the currency while continuously monitoring the US Federal Reserve's decisions and their effects on local markets.

Hail Cement Company is one of the leading companies in the Saudi cement sector, listed on the stock market under the symbol 3001. Established in 1976, its factories cover the northern and central regions of the Kingdom, serving parts of Jordan and Iraq. In 2024-2025, the stock price ranged between 20–25 riyals, with a market capitalization of approximately 3–4 billion riyals, placing it in the medium-sized company category within the sector.

In terms of financial performance, Hail Cement achieved notable growth in revenues and profits during 2023 and 2024, supported by increased demand for housing and infrastructure projects under Vision 2030. The company's price-to-earnings (P/E) ratio was around 12–15 times in 2024, reflecting stability in earnings and reasonable growth expectations for the future. The company maintained a good operating profit margin (15–20%) due to operational efficiency improvements and cost control, despite rising energy and raw material prices.

In terms of financial policy, Hail Cement maintained a moderate debt-to-equity ratio (0.4–0.6), reducing liquidity risks and allowing room for financing future expansions. The company also continued to distribute regular cash dividends, distributing about 0.80 riyals per share in 2024, representing a distribution rate of approximately 4% of the stock price.

The stock is characterized by relative stability in daily trading, with investors seeking fixed income gravitating towards the company due to its regular distribution policy. The stock has been affected by fluctuations in the real estate sector and oil prices but has maintained an upward trend supported by strong local demand and cautious operational policy.

The cement sector in Saudi Arabia is one of the vital sectors directly linked to economic development and infrastructure projects, especially under Vision 2030. The sector has seen significant growth following the COVID-19 pandemic, driven by the resumption of government and private projects and rising demand for construction materials. In 2024, the size of the Saudi cement market was approximately 45–50 million tons annually, with an export capacity of 10–15 million tons to neighboring countries.

The dynamics of the sector are influenced by several key factors: first, local demand driven by housing projects and major economic cities such as NEOM, Qiddiya, and the Red Sea project. Second, energy and raw material prices, as any increases in oil and coal prices lead to higher production costs, prompting companies to improve operational efficiency or raise local prices. Third, environmental regulations, as regulatory authorities impose requirements to reduce carbon emissions and use cleaner production technologies.

The sector includes about 7–8 major companies that dominate most of the production capacity, including Hail Cement, Yamama Cement, Eastern Cement, and National Cement Company. Competition in the sector is not fierce due to the geographical scope of each company, but any decline in demand may lead to price reductions or stimulate mergers or new partnerships to enhance efficiency.

Despite the challenges associated with fluctuations in energy prices and project financing, the sector remains supported by strong local demand and government housing programs, enhancing the ability of major companies to achieve stable profit margins and provide good returns to shareholders.

The Saudi cement market features a number of major companies competing to meet the needs of national construction and infrastructure projects. Alongside Hail Cement (3001), several key competitors stand out, including Yamama Cement, Eastern Cement, National Cement Company (Tabuk), Medina Cement, Southern Cement, and Najran Cement. Each of these companies controls a geographical portion of the market, with some overlap in high-demand areas.

Saudi cement companies enjoy high operational efficiency due to continuous investments in upgrading production lines and adopting environmentally friendly technologies. For example, Yamama Cement focuses on the central market and is one of the largest producers, while Eastern Cement dominates the Eastern region, and Hail Cement serves the northern and central regions of the Kingdom. Competition among these companies revolves around improving product quality, offering competitive prices, and ensuring supply availability for government and private projects.

The market also witnesses dynamics of mergers and acquisitions among small and medium-sized companies to enhance their market share and address regulatory and environmental challenges. Despite the competition, the increasing demand for cement due to large government projects provides each company with opportunities for growth and profitable returns.

Competition in the sector remains balanced, with major companies focusing on regional expansion and increasing production capacity to meet local and international demand while maintaining good profit margins and stable dividend policies.

In 2024, the US Federal Reserve continued its monetary tightening policy, maintaining the federal funds rate at 5.25%–5.50% in several FOMC meetings, indicating that any policy changes would depend on developments in inflation and the labor market. This approach directly affected global markets, with the US experiencing moderate growth slowdown while inflation continued to gradually decline.

In Saudi Arabia, the rise in US interest rates increased financing costs, impacting the growth of mortgage and commercial loans, especially in sectors reliant on bank financing such as construction and real estate. However, government spending remained high within Vision 2030 plans, supporting the stability of financial markets and the activity of industrial companies.

In the cement sector, Hail Cement reported slight growth in net profit for the second quarter of 2024, exceeding 10% compared to the previous year, supported by operational efficiency improvements and increased demand for housing and infrastructure projects. The company also announced its intention to increase capital to finance a new white cement production line, aiming to enhance production capacity and diversify products.

On the regulatory front, the Saudi Capital Market Authority introduced facilities for small and medium-sized companies to increase transparency, and Hail Cement responded by publishing regular financial reports and updates for investors. In the second half of 2024, local cement consumption rose to 45–50 million tons annually, with expectations of increased export capacity in 2025, providing a positive outlook for the sector and major companies like Hail Cement in the coming years.

As we enter 2025, global and local markets are focused on the trajectory of the US Federal Reserve's monetary policy, especially amid ongoing inflation above the target level and a stable labor market. The most likely scenario is that the Fed will begin to gradually ease monetary policy if inflation continues to decline and unemployment remains low, with the first rate cut expected in the second half of 2025. This change could redirect some investment flows back to emerging markets, including the Saudi market, and support rising financial asset prices.

For the Saudi financial market, strong activity is expected to continue in the construction and infrastructure sectors, driven by Vision 2030 projects and high government spending. Major cement companies like Hail Cement are likely to benefit from this momentum, especially with expansions in production lines and a shift towards high-value products like white cement. Continued stability in oil prices above $80 per barrel will support government revenues and enhance the ability to finance major projects.

However, there remain risks associated with fluctuations in energy prices and regulatory challenges, as well as the potential for sudden global economic slowdowns due to geopolitical crises or supply chain disruptions. It is crucial for investors and companies to closely monitor Fed decisions and global economic developments, adopting flexible policies in risk management and financial planning. The Fed's tightening or easing will remain the decisive factor in determining the cost of financing and liquidity flows in the Saudi market throughout 2025.