A new era of high interest rates and inflation has begun in the United States…and around the world. The voice of Jerome Powell expressing his unwavering “hawkish” (anti-inflationary) vision of his country’s monetary policy last week immediately impacted the financial markets.
As every year, a wonderful landscape hosted the annual meeting in Jackson Hole, Wyoming. There, the president of the Federal Reserve (Fed) of the most powerful nation on the planet affirmed that the central bank is prepared to raise interest rates even more if necessary. And he thinks it will.
The intention is clear: keep borrowing costs high until inflation is firmly on track toward the Fed’s 2 percent targetstill far away
And while Powell acknowledged that inflation has slowed from its peak, he warned that “there is still a long way to go.” He even suggested that if economic growth persists above trend as it is now, in the near future we could see even more restrictive monetary policy (even higher rates).
Such statements leave no room for doubt: nothing will stop the Fed in its pursuit of price stability. This leaves financial markets waiting for the next central bank decisions and watching how the economy fares amid the monetary squeeze.
an unchanging goal
Powell put an end to the debate on a possible increase in the Fed’s inflation target, stating that it will remain at 2 percent. And to the surprise of his audience, he acknowledged that the economy may not be cooling as quickly as anticipated.
Recent production and consumer spending numbers have been strong, suggesting that the economic recovery is still going strong. This situation could jeopardize progress in the fight against inflation and justify further tightening in monetary policy, the central banker said.
Market reactions
After investors took a closer look at Powell’s words, expectations of further interest rate hikes returned, sending yields on two-year Treasuries rebounding to highs not seen since July. , causing a greater inversion of the yield curve, a sign of recession for the medium term.
Now the probability that interest rates rise in September is 25 percent and 45 percent in November. This change in sentiment was clearly reflected, as I tell you, in the yield curve.
Mexico, in the new era of high rates
In this context of a new era, Mexico has entered with a firm step, perhaps too much.
Here the central bank – which anticipated the Fed in raising interest rates – has persisted in not easing its monetary policy despite the fact that the real interest rate continues to rise due to the contraction of price pressures.
Thus, added to factors such as macroeconomic stability and the flow of remittances, the great winner has been the Mexican peso with extraordinary strength, not exempt from affectations between exporters and those who receive income in dollars.
But there are also winners: importers, the national consumer and savers in debt instruments will continue to benefit from the artificial strength of the peso for as long as it lasts, and it will last a long time.
Meanwhile, the great sacrifice will be economic growth, credit expansion and debtorswhich will have to bear higher rates.
The economy could grow much more if interest rates moderated and were not excessively high and rising in real terms as they have been up to now, but the decision makers in Banxico’s Governing Board have the last word. Hopefully time proves them right.
Editor’s Note: This text belongs to our Opinion section and reflects only the author’s vision, not necessarily the High Level point of view.
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William Beard Master in Economics from the Austrian School; liberal, gold market specialist and editor of investment newsletter Top Money Report