Key Fed meeting begins today to define new rate hike

Previously, Jerome Powell defined that the authorities will take the necessary measures to restore price stability, even if it slows down economic activity. This generates a perspective of lower growth and gives continuity to a complex scenario of risk aversion, which has a negative impact on emerging countries in general and on Argentina in particular.

Isidro Guardaucci, economist at FIEL, highlighted in this regard: “When the Fed raises the rate, it happens that naturally it becomes more expensive for countries to borrow, and it also becomes more attractive to position themselves in Fed bonds than in assets from other countries in the world. world. Then the capital leaves the emerging countries, they usually go to acquire assets from the Fed and assets in dollars in the United States. For the emerging ones, this risk of ‘flight to quality’ and loss of assets opens up”.

For his part, the economist Juan Manuel Bogarin warned that the market is discounting a rise of 75 basis points, and would not rule out a rise of even 100 basis points. “The Fed is willing to lower inflation at any price, despite the fact that this leads to a strong cooling of the economy in the short term. The flip side of this situation is that after this shock, it would be expected that the monetary measures by the Fed will relax a little, perhaps towards the middle of next year. From the point of view of emerging markets, a rate hike is always bad news, from debt yields to the price of the commodities that each one of them exports, but again, the market is already anticipating it, it is already priced in assets to a great extent,” he said.

Likewise, the Fed’s rate movements strengthened the US currency globally, and led the dollar index, which compares the currency with a basket of currencies, to maximum values ​​in 20 years. Consequently, a strong dollar pushes a faster devaluation of the currencies of emerging countries, including Argentina’s main partners. In this sense, it opens a scenario of greater loss of competitiveness of the peso and increases exchange rate pressures at the local level.

Claudio Caprarulo, director at Analytica, pointed out that “the debate regarding the contractionary monetary policy that most of the world’s central banks are carrying out is whether that will produce a new recession or not.” And he expanded: “For now, the growth projections for this year and next are lower. In our country, there is pressure to increase the rate of devaluation given the appreciation of the dollar with respect to the rest of the currencies. At the same time, it makes the financial front more difficult, it makes external indebtedness more expensive, to which it has become very clear these days that Argentina must resort to it as soon as possible. Recently Kristalina Georgieva, director of the IMF, pointed out the greatest negative impact on developing economies with debt crises. Hopefully that translates into a flexible position in the negotiation with our country”.

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