Photo: Official White House Photo by Erin Scott
Yesterday (27), the Federal Open Market Committee (FOMC) of the American central bank, the Fed, met to decide the new interest rate level, continuing the upward movement that came as a reaction to inflationary levels not seen in more than four decades.
In general, analysts had expected the increase to be 75 basis points and got it right, which raised interest rates to 2.50% per annum. This increase was the same as that of the last meeting and, by American standards, is quite rare: the last one of this intensity had occurred in 1994. However, despite this, the movement was celebrated by the financial market, which considered it necessary, since official inflation ran at 10% a year.
In the economic world, people know that the natural consequence of fighting interest rates is to risk throwing the country into recession — a necessary process, painful as it is, to get rid of the greater evil of indiscriminately rising prices. But the political world didn’t like that at all.
President Joe Biden (pictured right) has his disapproval rate at record highs for a leader in the country’s modern history, and much of the population blames him for rising inflation. He tried to blame the invasion of Ukraine, but the population did not buy it, as prices began to rise long before the conflict.
Right now, the loss of popularity is especially worrying for the Democrats (the president’s party), with a majority in Congress and the Senate, because we will have elections for both houses in November. Given this, many experts already see the consequence that Republicans will gain control of both.
Soon, as soon as Jerome Powell, chairman of the Fed, raised interest rates under pressure (including from Biden himself), the ruling party realized that a recession would be politically disastrous, in an already precarious situation. Thus, the party’s leadership got together and began to say that, if there was a recession, it would be the American Central Bank’s fault.
The narrative would be to say that the body, being totally academic and disconnected from reality, only cared about economic indices and not about the population, unlike the Democrats, who feel the people’s desires. This got to the point that, on the eve of the FOMC meeting, Senator Elizabeth Warren went so far as to say publicly that “A recession is coming, and it’s totally the Fed’s fault”.
Well, the American BC may be independent, but it is not apolitical or naive, and it understood that it needed to change its strategy to defend itself. If they could avoid a slump in the economy until the elections, the pressure would ease and they could get back to their job of fighting inflation. And that’s what happened: in an interview after the expected rise in interest rates yesterday afternoon, Powell told the world to believe that, by the middle of next year, inflation will be back to 2.4% a year and that the The institution’s next decision will depend on the next economic data to be released.
Therefore, the market understood that the cycle of high interest rates will be shorter and that the chance of a recession has reduced. The immediate reaction of practically all the stock exchanges in the world was one of celebration and with large increases, in a generalized way. In short, the Fed realized it was going to be used as a scapegoat and reacted.
However, what about the economic part? We believe this new Fed stance should last for a few months; Nonetheless, they will have to tighten their tone again, even risking a recession, because inflationary pressures are far greater than anything seen in the last 40 years.and this is not resolved by raising interest rates from zero to 3.5%.
But we believe that they know this and are only “buying time” so as not to suffer from electoral pressures. Strategically, they are correct. We only hope that this postponement does not feed inflationary inertia, which would produce even higher interest rates later on and harm – as always – the population and not the politicians.
Rodrigo Natalichief strategist at Inv Publications.
note: Movements in the American economy impact markets around the world, including Brazil, and you need to be prepared not to be taken by surprise. In the series “Você Gestor”, the macroeconomics specialist Rodrigo Natali, with the help of Nícolas Merola, a certified financial analyst (CNPI), simulates a multimarket portfolio in real time to bring you the best investment suggestions in any scenario. Find out about the “Você Gestor” program by clicking here.