Jerome Powellthe head of the Federal Reserve of the United States, will face on Wednesday the most serious dilemma of the last years on the evolution of the first economy of the world.
In the midst of the accelerating banking crisis unleashed a week ago by the fall of the Californian Silicon Valley Bank (SVB)), which has funded tech startups, Powell has to decide whether or not to continue with its aggressive rate hike policy of interest to fight inflation.
That benchmark rate is 4.75% per annum and, until a week ago, the expectation was that it could continue to rise to 6%. But the collapse of the SVB changed everything and now the bet is that Wednesday will only go up 0.25 points or stay as is.
Powell’s dilemma is to keep raising the rate a defend your credibilityor halt the increase to moderate the run on deposits that is happening from the smallest to the largest regional banks.
The SVB has been removed 42 billion dollars in one afternoon (depositors didn’t have to queue) and the US government ordered full deposit guarantees but the markets didn’t calm down: the Flaky Credit Suisse.
For Argentina, the tail was strong: stocks and bonds fell (they went back to $25, losing everything they had gained earlier in the year and beyond) and country risk rose (to 2,374 points). The prospects have become murky and have added uncertainty to that generated by inflation at 6.6% in February.
The increase in the cost of living in the first two months speaks of a “economy without anchors” as highlighted in the latest report from the consulting firm abeceb and the important dilemma facing the Minister of Economy.
Part of the dilemma of how to contain the dollar and tend to stabilize the exchange rate situation (liquidity with liquidation is at $403 and the gap has returned to 100%) is being resolved with a three-point hike in the reference rate, which is now is at 78% per year, 113% effective per year.
The intent is for the rate to exceed inflation and absorb the pesos so they don’t go to the Dollar purchase. The problem is that whoever ends up having to issue to pay the highest interest is the State itself, which is the main market creditor.
The other part of Massa’s dilemma is the lack of dollars forever but now sharp.
While the camp tries to assimilate the fort hit of drought on production and exports, the Central Bank continues to act as the only net seller in the market and reserves continue to decline.
The ability to use the $5,000 million free trade with China is just around the corner and would be a bridge to some kind of soybean 3 dollar or other sector change improvement that brings some reserves to Central.
Massa awaits the disbursement of 5,200 million dollars from the International Monetary Fund (must be approved by the Board of Directors) also to see the discontent generated in the organization by the sanction of the new pension moratorium which was not in the negotiation papers to overcome.
For Crystalina Georgieva, head of the IMF, It must be difficult to accept that Sergio Massa promises a reduction in the fiscal deficit almost simultaneously with the approval of the CEO pension moratorium which implies an increase in public spending equal to 0.4% of GDP.
But on the domestic front there is growing discussion about whether the government should achieve the deficit drop to 1.9% of GDP this year due to the drought and the consequent loss of harvest due to the lower contribution of withholding taxes to agricultural exports.
The economist Emmanuel Álvarez Agis, former deputy minister of Axel Kicillof, threw the first stone saying that, in this context, he preferred not to reach the fiscal target agreed with the IMF. Friendly fire for Massa?
The precariousness of exchange rate stability in recent weeks (the Central Bank has sold over 730 million dollars) does not leave much room for thinking that the Government will deviate from the commitments made with the IMF, but it must also be considered that the electoral political race begins to accelerate.
And politics, as Blaise Pascal defined it in the mid-1600s referring to the heart, “has reasons that reason ignores”.
Charles Arterburn is a seasoned business journalist for News Rebeat, where he provides comprehensive coverage of the latest trends and developments in the world of finance and economics.