Opinion – Rodrigo Zeidan: Giving an interest rate shock in the US now would be a mistake

Nothing is more common in economic analysis than extrapolation because of just one new piece of data. But markets tumbled after US inflation data came out a mere 0.2% higher than expected. Worse, the Federal Reserve is now expected to raise interest rates, in something similar to the “Volcker Shock” of the 1980s, which threw the world into a deep recession, to the point of destabilizing all of Latin America.

The debate over the trajectory of US rates should not be influenced by August’s inflation, but it appears that there are now big bets that US rates will soar.

Fed officials have already gone public with announcing that interest rates should continue to rise, but expectations are that the US central bank can repeat what Volcker did in the past. However, that would be a mistake; catastrophic for emerging countries. The Fed was wrong not to have started raising rates months earlier, but now it may fail to raise rates too quickly in the economy.

Even today, it is not clear whether the Volcker shock was so effective in fighting inflation, as there were signs of a slowdown in prices in the early 1980s. However, there was a clear argument for pushing interest rates into the stratosphere: American inflation. was way above normal for almost ten years.

From 1970 to 1973, US inflation fluctuated between 3 and 4%. In 1974, with GDP shrinking by 2% because of the first oil crisis, inflation passed 12%. From 1975 to 1978, prices increased by more than 6% a year. In 1979 and 1980, with the second oil shock, inflation went back to more than double digits, more than 12.5% ​​per year.

Volcker took over the Fed in August 1979, with interest at 10.5%. In October, he called a surprise meeting that pushed interest rates to nearly 14%. By April 1980, interest rates were already at over 17%, with an all-time high reaching 19% in June 1981. As a result, the US experienced two recessions in three years, unemployment passed 10%, there was a beginning of financial crisis, and farmers even closed the center of Washington with their tractors, protesting against the increase in interest rates.

But today, there are no indications that world inflation is here to stay. In accumulated terms, the CPI (Consumer Price Index), equivalent to the American IPCA, is at 9%, but has already stopped accelerating. In addition, much of the inflation is a result of supply constraints from the global supply crisis, which is unrelated to interest rates and is unlikely to get worse. In the early 1980s, many American prices and wages were indexed to past inflation. The interest rate shock made some sense in that scenario. Today, it no longer does.

Still, we will see US interest rates rise. But an extreme reaction will throw the world into recession.

In Brazil, the Bolsonarinho peace and love version only fools those who are very muggle. After making dozens of jokes against the suffering of the people, verbally assaulting journalists, advertising chloroquine and postponing vaccines while calling society a sissy, does anyone believe he regretted anything? The president never showed any empathy; neither he nor anyone on his team. He only knows how to behave in one of two ways: aggressively or playing the victim. Seeing defeat coming dressed in red, he tries any tactic to stay in power. And continue his career as a gravedigger.