Dollar and rates: the key decision that the US will make and how it will impact Argentina

The Federal Reserve of the United States (FED) will make a crucial decision this Wednesday, considering whether to increase the interest rate reference at 25 basis points or maintains the current range between 5.25% and 5.5%. This dilemma arises at a time when the US economy shows signs of overheatingwith a very active labor market and an inflation that continues above the goal established by the entity.

He Federal Open Market Committee (FOMC) of the FED meets in Washington starting Tuesday the 31st to evaluate various economic indicators and determine whether it is necessary to increase the cost of money.

Last week, the FED issued warnings about various risks to the US economy, including the persistence of inflationpossible losses in the real estate market and tensions in the financing of some banks. This comes after an acute crisis in March, when several regional banks showed weaknesses, leading to federal intervention to protect customer deposits, including Signature Bank and Silicon Valley Bank.

The FED Financial Stability Report It also points to the economy’s vulnerabilities, in particular the persistence of inflationary pressure. According to analysts, if inflation remains high, The FED could apply a more restrictive monetary policywhich would increase the cost of credit and could result in defaults in the trade and real estate market.

Interest rates: the background

Since March 2022, the FED has increased the interest rate eleven times, taking it from the 0% to 0.25% range to the current 5.25%/5.50%. Most Wall Street analysts and investors anticipate that the entity will keep rates in the current range.

This comes against a backdrop where consumption continues to be supported by credit-based household spending, retail sales show no signs of slowing and factory orders remain at elevated levels. US GDP growth in the last quarter it is 4.9%, which shows that the economy is advancing at a rapid pace despite the interest rate levels.

However, concern centers on the Treasury’s high levels of debt. Former Treasury Secretary Lawrence Summers warns that due to rising debt and higher deficit, the economy will experience greater demandwhich will increase the neutral interest rate, that is, the one that does not drive economic expansion or contraction.

The debt has become a serious political problem for the White House, as Republicans have given a deadline of November 17 for Joe Biden’s administration to accept spending cuts.

At the FED there are also divided opinions on the viability of a rate adjustment. FED Chairman Jerome Powell opts for a cautious approach in his statements, noting that there is no conviction that monetary policy is the best way to address inflation.

In summary, the FED faces an important decision in a context of economic uncertainty, where the balance between controlling inflation and supporting economic recovery is a complex challenge.

Analysts consulted highlight that a possible increase in rates by the Federal Reserve could impact the Argentine economy, due to various factors such as a drop in the international price of commodities and a lower flow of capital to emerging countries.

An increase in interest rates in the United States would encourage the withdrawal of capital flows from riskier assets, including emerging markets. This would cause an increase in liquidity in emerging markets, including Argentina, which is little exposed to international financing. A possible relief for inflation in the United States could come from raising rates. The increase in prices of goods and services derived from the weakness of the dollar harms Argentina in foreign trade. Therefore, an increase in rates that mitigates price increases would help reduce the inflationary effect of imported products on our economy.