Jerome Powell and a decision that will affect Argentina and its partners.
what will be announced
For now, we should expect three things:
– The president of the United States Federal Reserve (Fed), Jerome Powell, will today announce a half-point increase in the interest rate. This is from the 0.25%-0.50%range to 0.75%-0.50%. The last time the rate rose was two months ago and at a quarter magnitude of a point. Wednesday’s increase was the highest in 20 years. A less widespread forecast for this afternoon is that the increase is more than half a point: there are analysts who expect an increase of 0.75 basis points.
the– it will be confirmed that the Fed will cut assets by US $ 90 billion per month starting in June and at a faster rate than five years ago when it also began the process to ‘clean up’ its balance sheet.
– The press conference Powell gives at the end of the meeting will be key: he can provide guidance on how much the rate will increase at the June meeting and what inflation rate is expected for the US.
What is the rate of fed funds
This is the rate at which commercial banks and credit institutions lend money within the United States financial system. The Federal Reserve controls its rate to affect the liquidity of money in the economy based on the cycle of activity, the labor market and the evolution of inflation.
How monetary policy works
When the Federal Reserve raises the rate, commercial banks and institutions have more incentives to lend money to each other, increasing their supply within the financial system but providing less liquidity to families. and company. When it collapses, banks have fewer incentives to pour that money into the banking system and divert the money supply to the rest of the economic system, which lowers the value of credit.
What is its effect on the street?
This influences consumption and loan costs in the United States, where the capital market is important. This includes mortgage rates, credit cards, time deposits, personal, pledge and corporate loans.
Why will the Fed raise rates
The increase in rates is intended to cool the economy. Inflation in the United States was the highest since January 1980. In March it reached 8.5% per year. The president of the Federal Reserve last year argued that inflation was a temporary phenomenon as a result of restrictions on the supply of post -pandemic products that caused bottlenecks and, therefore, price increases. In the US, used cars have risen by more than 40%. Now he is in favor of raising charges because he believes there are elements that suggest inflation may take longer than he expected because of all the liquidity injection to fight the pandemic. Other factors pointed out by the Fed in favor of raising rates are that the U.S. labor market has recovered to pre-pandemic levels in terms of recruitment (there are 5 million job vacancies above the number of unemployed). work according to Goldman Sachs) and the Russia-Ukraine war put pressure on energy and commodity costs through Western sanctions on Moscow.
How high will the rate be?
The rate is expected to hit 1.9% by the end of the year and close to 2.75% by the end of 2023. The last time the Fed raised rates was in March. Between 2015 and 2018 he did it nine times. Between 2004 and 2006, it increased them 17 consecutive times.
How it affects Argentina
Mainly by channel commercial. The most likely scenario for the world today is stagflation, a period of low growth and rising inflation. “The question now is how long will the stagflationary process take”said this week the Financial Times. US GDP is projected to grow 2.8% this year according to Fed minutes released in March. Now the new projections will be known. The consensus growth for the world indicates that the rate for the world this year will be 3.3%. Before the war, the rate was expected to be over 4%.
An expected effect of the Fed’s interest rate hike is that demand for the dollar as a safe haven around the world has risen recently. The dollar-Wall Street Journal index hit its highest in two years. A stronger dollar means lower commodity prices. This could be a threat to raw material producing countries such as Argentina..
“The deterioration of global markets, especially due to the strengthening of the dollar around the world, and against emerging currencies in particularadd a new source of tension to the local market, which cannot afford to take advantage of the good international prices of raw materials “said Martin Polo, Cohen’s chief economist.
Source: Clarin
