Why Bankers Event in the US Wild West Affects Your Pocket

Faced with a landscape of rocky mountains of the American Wild West, central bankers and finance authorities begin to discuss this Thursday (25) measures impacting prices, financing and wages around the world.

Organized annually since 1978 by the Kansas City Federal Reserve Department, the Jackson Hole Economic Policy Symposium in Wyoming is reputed to anticipate trends that could shake up the global economy.

It was at the 2007 meeting at the hotel on Lake Jackson, whose name is shared with the valley where the event is held, that the alert was raised about problems in real estate financing in the United States, whose bubble burst in 2008 caused a global economic crisis. .

In the 1980s, the conference anticipated a historic rise in interest rates in the United States, which had among its side effects a serious public debt crisis in South America.

At the time, the debt of Brazil and its neighbors was mostly pegged to the American currency, whose international price soared. Dollars become scarce and therefore expensive in developing countries when US interest rates attract investors to US fixed income.

There are similarities between the current economic scenario and that of the 1980s, which increases the importance of the event this year and, especially, the pronouncement of Fed Chairman Jerome Powell, scheduled for this Friday (26).

Powell is not expected to say exactly whether or not rates will rise next month, but as he is among central bankers like him, the Fed chairman is expected to comment in more detail on the strategy for striking a balance between a rate able to quell the highest inflation in the country in 40 years, but without dragging the world into recession.

“The big question today is whether the United States will do what we call a soft landing”, says Ricardo Hammoud, professor of macroeconomics at Ibmec-SP.

Hammoud reinforces that the cost of credit in Brazil depends considerably on the Fed’s decisions on the US rate. “Interest in Brazil is the sum of the US rate plus the Brazilian risk,” he says.

Fed rates are currently at 2.5% and, considering a scenario of aggressive hikes through the end of the year, could reach close to 4%. In Brazil, the basic Selic rate is 13.75% per year.

The Central Bank of Brazil will be represented by Fernanda Guardado, director of International Affairs and Corporate Risk Management.

Why interest rates in the US matter so much

Interest and inflation in the world’s main economy have an impact on the fluctuation of exchange rates and the prices of shares traded on Stock Exchanges around the world. They also affect public and private investments and job creation in the world.

The group responsible for discussing these issues in the United States is called Fomc, which stands for Federal Open Market Committee.

These advisers debate the federal funds interest rate target at eight meetings throughout the year. The task is similar to that of the Central Bank of Brazil’s Copom (Monetary Policy Committee).

The rate of the Fed’s market operations influences the interest charged on loans that private banks make to each other, an important instrument for the daily cash adjustment carried out by financial institutions.

Interest on transactions between banks is reflected in the cost of credit in general, such as personal loans, real estate financing and others.

Controlling credit is a way of regulating the amount of money in circulation and, consequently, keeping inflation at acceptable levels. It’s what economists call monetary policy. This is the basic mission of central banks.

When interest rates are low, credit becomes more accessible. The low cost of borrowing encourages people to buy goods and consume. Companies put projects in progress and generate more jobs.

That’s why Fomc lowered its interest rate target to zero when the Covid pandemic paralyzed global economic activities in March 2020. The idea was to put more money into circulation through loose credit and, thus, avoid an explosion of layoffs.

In times of abundant and cheap money, large investors are more willing to buy shares in companies from emerging economy countries, such as Brazil, a type of investment considered risky due to the instability of these markets. The resources allow business growth and the generation of work and income.

In opposition to the generous offer of cheap credit, the tightening of monetary policy (raising interest rates) in the United States harms Brazil and other emerging countries because, simply, there is less capital available for investment.

By raising interest rates, the Fed raises the reward for those who invest in the US Treasury, whose risk of losses due to a default is considered non-existent.

With a safe option paying more, investors are more selective. Many give up on the shares of companies, especially the riskier ones.

Other central banks are forced to raise interest rates to convince investors that the return offered by their sovereign bonds is worth the risk they take by not bringing their dollars to the US.

If dollars return to US fixed income on a large scale, the exchange rate soars and import costs soar. Raw materials, whose prices are dollarized, are also more expensive. Inflation is right.