As we pointed out in a previous installment, market analysts, who always follow the Federal Reserve (Fed) of the United States, have begun to modify their figures and expectations. The possibility that it is the beginning of a review of scenarios grows more and more towards the feeling that the recession in the largest economy on the planet is imminentand would even be promoted by its central bank, to get out once and for all of the quagmire that this post-pandemic inflationary outbreak has meant.
Massive modification of figures and expectations
What is already an undeniable fact is the modification of figures and projections made by market participants, beginning with the members of the Fed, thus validating what the markets think.
Thus, for example, the president of the Minneapolis Fed, Neel Kashkari, is betting on an interest rate increase to a level of between 5.25 and 5.5 percent, which means 25 base points more than his December baseline scenario. past.
John Williams, the head of the New York Fed, shares the same expectation, along with almost all Fed members, who in addition to having modified their expectation on the Fed’s terminal ratehave de facto ruled out an interest rate cut for this yearjust as they expected in December of last year when they anticipated that towards the end of 2023 the Fed would be able to start cutting interest rates.
Even worse, some of the Fed members believe that even in the first half of 2024 it would be difficult to see a central bank action in this regard.
And of course, many of them, without saying it fully, no longer rule out that at the meeting this coming March 21 and 22 the Fed will make a coup of authority in the table and raise the rate 50 basis pointsmovement with which the ceiling level of 5.25 percent would be reached, waiting to see how the markets react.
Rate could reach 6% in the US, or more
It’s not widespread yet, but some private analysts are already dealing with terminal interest rate levels that were unthinkable when the Fed’s rampage began,
According to some reports in the markets, experts such as BlackRock analysts and operators are delving further into the rate hikes, necessary by the Fed, and consider a terminal rate of up to 6 percent as probable.
But it is not all in your scenario, the experts of one of the most influential investment funds in the world consider that if the rate reaches those levelsthe probability that it will stay there for a long time is high, at least also for the rest of this year.
“Today’s economy is no longer as sensitive to interest rates as it was in past decades; In this sense, although its resilience is a virtue, at this moment it complicates things for the Fed”, BlackRock analysts explained in a note for their investors. In that same document, they expect an increase of 50 basis points at the next meeting this month.
For its part, Goldman Sachs, another “shark” in the market, already incorporated a terminal rate of 5.50 percent into its scenario this week at the Fed rate. This means that the central bank will increase its current federal funds rate by 75 basis points in the coming months..
This bank does not rule out new reviews depending on the evolution of circumstances in the coming weeks, “the ceiling could rise depending on the scenarios,” he said. He also believes that the terminal interest rate, whatever it may be, will have to be in force for at least the remainder of this year.
And if the private analysts who work for large financial consortiums are less optimistic than the Fed and consider that the interest rate could reach levels of 6 percent, some who work for their own account, but who have achieved a certain prestige are still more pessimistic, or more “adventurous”.
Dominique Dwor-Frecaut is now self-employed, but her experience at the New York Federal Reserve, International Monetary Fund, World Bank, Barclays Bank, ABN AMRO and Singapore’s RBS, along with her PhD in economics from the London School of Economics, give it the necessary credentials to be heard by the markets in general and by large investors in particular.
The problem for the Fed is that the expectation of this expert, with many miles traveled in the markets, is up to now even somewhat “reckless”, since points out that the Fed will need to raise the rate to levels of 8 percent to fully control inflation and return over time to its target of 2 percent per year.
“The Federal Reserve’s inflation game plan remains reactive and the risk of falling further behind the curve increases. Also, market and economic data shows that the gap between the actual FFR and the Taylor rule is still too wide. The Fed will not only have to do more, but it will have to do much more”, he recently pointed out in one of his analyses, which are consumed daily by the markets in the planet’s great financial centers.
If the Fed raises the rate more, what will Banxico do?
In the last months of last year, some analysts of the Mexican market considered that the Bank of Mexico (Banxico) could break away from the Fed even in the first quarter of this year, since it had started its growth cycle before the US bank. and that the inflation figures showed signs that they were beginning to drop consistently.
Today few, or perhaps no one in their right mind could validate this scenario; Even after Fed Chairman Jerome Powell’s words this week, there is no doubt that Banxico will at least have to follow the Fed’s steps closely, even if it did so at the last meeting when it unexpectedly raised interest rates. 50 basis points to the current level of 11 percent.
So if the Fed escalates, Banxico will have few options to do otherwise.. And if the terminal rate of the US central bank reaches 6 percent, in Mexico a double level would not be ruled out.. If the most pessimistic scenario materializes and the Fed raises the rate to 8 percent, you, dear reader, add at least 600 base points or 6 percentage points to that same rate and you will have the level that we could reach in our country, with all its effects. , which we will deal with in future deliveries.
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