The financial scenario continues to complicate globally and in Mexico the effects will almost inevitably be felt. The economic slowdown in the United States will be a reality this and next year, in addition to the fact that the winds of recession are still strong. There is not much to do beyond stating what is expected and keeping the issue as a priority on the country’s economic agenda, to try to reduce any of the many effects it will have.
Fed did not surprise with rate hike, but with forecasts
Finally, without any surprise and as expected by the markets, the United States Federal Reserve Bank (Fed), decided to increase its reference rate for federal funds by 75 basis points, to be placed in a range between 3.00 to 3.25 percent. This is its highest level since 2008.
But, without a doubt, where there was surprise and led the markets to maintain their negative bias of recent weeks, it was in a series of data and projections that only feed expectations that the recession in the United States is increasingly close, and that economic growth will have a lot of trouble sustaining itself.
In this context, the powerful US central bank updated its economic projections; for instance, pointed out that the interest rate could close 2022 at an approximate level of 4.4 percentwhich compares unfavorably with the 3.8 percent projection announced last June.
Beyond, by 2023 this same reference rate will barely drop to 3.9 percent at the end of the year, higher than the expectation of 3.4 percent also announced in June.
Regarding economic growth, the Fed did not announce a recession, but something very close, since it estimated that the country will have growth this year of just 0.2 percent, which is a true collapse compared to the expectation that was had in June last when growth of 1.7 percent was expected.
Inflation also suffered an unfavorable adjustment, According to the Fed, this indicator will end this year at levels of 4.5 percent and that unemployment will rise to a rate of 3.8 percent..
Jerome Powell warned that there is no painless way to achieve price stability. In this sense, an increase in unemployment and a period of growth below the historical trend are necessary to return to a healthy long-term labor market and stable growth.
Otherwise, Powell warned, the process would be more painful, with unanchored inflationary expectations that would have a greater impact on the country’s economy.
Powell said the historical evidence is that monetary conditions should not be eased prematurely.
On the other hand, Larry Summers, a former US Treasury secretary, recently made a similar comment in an interview. The above makes it clear that the Fed even prefers to exaggerate in the increase in interest ratesuntil you have full evidence that you achieved your goal.
All of the above was bad news for the world’s financial markets, and also for the economies. Once again, Mexico cannot remain isolated, especially when the United States is our main trading partner and there is a clear interrelationship in the financial markets.
The consequences for Mexico
Strictly speaking of the effects of the Fed rate hike in Mexico, it is very clear that the same trend will be observed in our country.
However, this increase in rates will be a very important benchmark for our market, since it is almost inevitable that the short-term rate of Cetes in the money market, the 28-day rate, will rise to double digitssomething that we have not seen in more than two decades, unusual for the new generations, a large part of them had not seen this phenomenon in their lives, or were very young when it happened.
If we consider that between the markets of Mexico and the United States there is a margin in the interest rate of approximately 600 basis points or 6 percentage points, and if at the end of 2022 the federal funds rate in the United States will close at approximately 4.4 percent, then it is inevitable that in our country Banxico’s reference rate will be at least 10 percent because Banxico will have to make adjustments upward to maintain the same spread. Then thenthe short-term rate in the money market, which is used for the rest of the indicators in the national financial market, that of the 28-day Cetesit will not only be placed but even exceed the 10 percent level.
The last occasion in which the reference rate of the 28-day Cetes was in double digits was on Tuesday, June 7, 2001, when it stood at 10.39 percent, the immediate week registered a significant drop of 0.88 points and was set at 9.51 percent, since then it is not located in double digits.
In Mexico, there are at least two generations of Mexicans who do not know what 10 percent rates are as a benchmark in Cetes, nor in Banxico’s benchmark.
Virtually the entire Millennial generation has not seen higher-single-digit referral rates during their working lives. For their part, the Centennials, who are gradually entering the labor market, fortunately do not have the slightest idea of what a 10 percent rate is as a reference, they do not know a double-digit benchmark.
It is almost inevitable to see an upward escalation in interest rates in our marketwhich we have not observed in more than two decades, at the dawn of the century.
Even at that time the conditions were different since the trend in rates was exactly the opposite, downwards; in contrast, today they have a bullish trajectory that will not end in the short term.
The effects on the financial markets will be diverse, but especially in the pockets of the credit subjects, and also in the conditions of the new credits. We are facing a phenomenon that has not been seen in a long time.