The Fed cuts US interest rates: what it means and how it can affect Argentina

The Federal Reserve (Fed) will lower interest rates this Wednesday for the first time in more than four yearsa decision that will begin to reverse the restrictive conditions it imposed to curb inflation. The key is whether those responsible for monetary policy opt for a half-percentage point cut or a smaller move.

Your decision on how you want to start a new cycle of relaxation -less than two months before what is expected to be a close US presidential election- It probably depends more on the signal they want to send by leaving behind the highest interest rates in a quarter of a century than on expectations about the short-term macroeconomic impact, although their concerns about the labour market are increasing.

A half-percentage point cut – now given a more than 60% probability in rate futures markets – would signal a commitment to maintaining the current economic expansion and the accompanying job growth, something Fed Chairman Jerome Powell has said is a top priority as inflation approaches the central bank’s 2% target.

A quarter-percentage point reduction in borrowing costs would be more consistent with how the Fed has initiated previous easing cycles outside of any brewing crisis. It would be in line with the cautious approach policymakers have said they were taking toward rate cuts and would follow economic data that have shown the economy is slowing but not, apparently, on the verge of breaking down.

Recent job growth has slowed from the high levels of the COVID-19 pandemicbut it continues being positive. Retail sales and industrial production data released Tuesday beat expectations and an Atlanta Fed model that tracks economic growth estimates based on incoming data shows the economy is expanding at a 3.0% annual pace so far in the third quarter, above the central bank’s estimates of U.S. potential.

“We have never approached a major turning point on interest rates without more certainty” about how it would beginwrote Diane Swonk, chief economist at KPMG, before the start of the Fed’s latest two-day policy meeting. But while a 50 basis point cut “will certainly be discussed,” Swonk said, “Powell is unlikely to have the votes.”

Others argued that after the Fed’s last meeting in July, where several policymakers were open to cutting rates at that time and with investors flocking to bets for a half-percentage point cut, doing less would be seen as failing to live up to Powell’s statement last month that he did not want the labor market to weaken further.

Fed rate cuts: how it could impact emerging markets and Argentina

“Us We are more aligned with the market, seeing a slightly higher probability of the Fed cutting 50 points rather than 25.. However, the recent volatility of the implied downside and the dispersion of opinions ensures that some will be surprised, but also that others will be able to capture profits,” explained Delphos Investment.

And this makes less likely to have a very significant impact on the US bond market (there will be surprised people, but not all of them).

Currencies, stock markets and commodities, meanwhile, are more open-ended, less straightforward issues.

“Focusing on the major currency markets, we believe that further dollar depreciation will be welcomed by the rest of the markets, and a rebound will be bad news. Our main global focus is on the Japanese yen and the Chinese yuan. All of which are key dynamics for Latin American assets, in particular for the Brazilian real and the Chilean peso, as well as the Argentine peso.” highlighted Delphos Investment.

A Fed rate cut is “always beneficial for peripheral countries. This is because US Treasury assets are considered risk-free, so if the return on these assets decreases, investors will look for instruments that offer higher returns,” said Pedro Moreyra, director of Guardian Capital.

It is in this last one where “Investment options such as Argentine sovereign bonds and equity are emerging. This appetite for greater risk may benefit the price of Argentine assets,” Moreyra predicted.

In the aftermath of the pandemic, a combination of shortages of goods, massive spending, labor shortages, large public deficits, and aggressive pricing by companies led to the US inflation to 40-year high in 2022. While wage growth was also strong and for many workers outpaced price increases, sentiment was gloomy for much of the time, as the Federal Reserve raised interest rates to try to slow the economy, mortgage rates rose in response and banks curbed credit for many types of loans and borrowers.

Inflation, as the Federal Reserve’s most closely watched measure, is now at half a percentage point of the central bank’s target and is expected to gradually decline over the rest of 2024 and next year. The economy has performed better than expected on almost every measure and the Federal Reserve is now expected to shift gears and offer its first clues on Wednesday about the speed and extent of its turnaround.