The minutes of the meeting of the Federal Open Market Committee (FOMC), the equivalent of the US Monetary Policy Committee (COBOM), published on Wednesday afternoon (6), confirmed the market’s bearish expectations. Patience has run out with inflation, and interest rates will rise until prices stabilize, regardless of the economic cost of this change in direction.
Central bank documents are written as neutrally as possible, but this time the draft was clear. “Participants [do Fomc] He agreed that the economic outlook warranted a change in restrictive policy stance. It didn’t stop there. “A more restrained stance [pode] Appropriate if high inflationary pressures persist. Translation: Interest rates are expected to rise by 0.50 or 0.75 percent by the end of the July meeting. There will be at least two rate hikes after that. In a worst-case scenario, interest rates today would rise from 1.5% to 3.5% per annum. “Inflation is too high, and the central bank’s biggest concern is getting it under control. That’s a much bigger concern than avoiding a possible recession,” said Andre Noucy, founder of Noucy Finance.
This represents a drastic change. Over the past 12 months, the Federal Reserve (Fed) has treated inflation with infinite patience. Fed Chairman Jerome Powell has kept interest rates at zero and pumped $120 billion of cash into the economy each month, fearing the economy’s post-coronavirus crisis would abandon its recovery. Because it couldn’t be otherwise, prices exploded with the flood of resources in the system.
On June 14, the Consumer Price Index (CPI) for May was released, recording 12-month inflation of 8.6%, the highest level since December 1981. On June 30, Personal Consumption Expenditure (PCE) for May was released. A less popular index than CPI, but more relevant to the central bank’s assessment, PCE confirmed expectations and stood at 6.3% over 12 months, the same percentage recorded in April. Core PCE inflation, known as the ‘core index’, which excludes highly volatile prices of food and energy, fell to 4.7% over 12 months, down from 4.9% in April. These numbers are far from the target of 2% per year. “It’s like a ticking clock,” Powell commented in the document.
expectations Inflation causes a second problem, the fear of ‘disconfirming expectations’. A complicated word hides a simple reason. Since they began adopting inflation-targeting regimes in the late 1990s, central banks have been managers of expectations rather than managers of money in circulation. As a result, it becomes more important for businessmen, investors and bankers to believe that inflation targets will be met. Without this confidence, they will adjust prices to prevent inflation, making rising inflation rates a self-fulfilling prophecy.
This was the concern of those at the Fomc meeting. The text was clear. “Many participants perceived a significant risk … that high inflation could take root if the public began to question the group’s commitment to warrant a change in policy stance.” If this entity called the market—both financial and industrial and services—fails to believe that the central bank will do whatever it takes to reduce inflation, prices will explode. So the central bank’s decision that it is necessary to fight inflation is to slow down an economy that is already losing its momentum. “That would be a necessary evil,” said Leandro Odavio Sobrinho, an investment expert at Rice.
What are the implications for Brazil? According to Sobrinho, this situation usually scares the market and affects developing countries like Brazil. The main side effect would be a depreciation of the real against the dollar, which would harm growth and put pressure on inflation here.
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