This week the Federal Reserve Bank of the United States (Fed) and the Bank of Mexico (Banxico) will carry out, each on their own, their last monetary policy meeting of 2022.
If we had to choose a phrase to define what happened this year with both institutions and based on that what is expected for the following year, there is no doubt that we can say the following: “the work is not done“.
In other words, despite the fact that the actions of both central banks, led of course by the US Fed, managed to contain the inflationary surge in the first instance and eventually reverse its upward trajectory, it is a fact that they have not fulfilled their final mission.
For both banks, the objective is one, and it is very clear: to return the growth of general prices to the objectives of their monetary institutions.
In other words, in the case of the central bank of the United States, an annual inflation reading of 2 percent is sought, with a certain tolerance bias, although in reality it does not exist as such in the objectives of the monetary institution. In the case of our Banxico, an inflation reading of 3 percent per year plus/minus one percentage point, which means that the maximum reading should be 4 percent per year in inflation.
From the “transitory” to the “necessary”
The Fed went from one monetary position to another in just one year, a sign of the new times in which flexibility is an essential factor for any central bank or institution that has any responsibility towards investors or the general public.
The closing of the year 2021 of the Fed was very different from the one registered in this 2022. A year ago, trapped in its own contradictions and foolishness in not fully recognizing the phenomenon that was observed, the Fed was beginning to watch its rationale for “transient inflation” slowly but inexorably fade away. In a last attempt to justify his late action, a few weeks after the end of 2021 he released that phrase that will go down in history by pointing out that the markets had “misinterpreted the transitory word”; that is to say, a word whose definition was established centuries ago was torn to shreds in seconds by the monetary body.
2022 is completely different, the Fed has indicated that it will do “everything necessary” to combat inflation and reach its objective, it has indicated and acknowledged on different occasions that “the task” has not been done, and that they will raise the interest rate as much as necessary.
The Fed went from “transitory”, with everything that can be understood by that wordas assured by the monetary body of the United States, to what is “necessary”, a total change.
The “road map” for 2023
The so-called “road map” for 2023 is so far clear in the case of both institutions, even though in the case of Banxico there is talk of a separation from its US counterpart.
The increase in interest rates will reduce its dimension, but it will not stop. In fact, this same week a decrease in the magnitude of the interest rate increase is already scheduled to go from 75 base points, as has been done on the four previous occasions throughout this year, to 50 base points.
This contraction has been considered a measure to begin to assess how the economy and markets react to the rate hike, in addition to the fact that inflation has shown signs of receding in recent months.
However, the Fed has warned that the so-called “terminal rate”, that is, the final rate that will be reached in this upward cycle, could be higher than that estimated last September. The analyzes place said rate at levels of 5.25 percent, which means that there is still an upward path of at least 125 basis points for the following year., analysts estimate that it would be specifically throughout the first half of the year, to then take a break in the second half of the year; a reverse trajectory in interest rates will only be verified in the first quarter of 2024, if conditions allow it.
The case of Mexico will not be very different, it is estimated that Banxico’s terminal rate should be around 11.50 percentif nothing else happens.
As for the possibility of disengaging, it is considered more an idea than a reality, at the risk that the markets in our country react negatively, especially with regard to the exchange rate.
Thus ends another year, leaving us in the central banks of Mexico and the United States, a different face from 2021, with the conviction of wanting to end inflation, but aware that the task is not finished and that they must do more yet to meet the target, after in 2021 negating this inflationary spike that has rocked economies like it hasn’t in decades.
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