Opinion – Solange Srour: Maybe the Fed won’t allow us to wait so long for a credibility shock

After an intense period of international bonanza, such as the current one, it is natural to fear the end. However, there is reason for increased uncertainty earlier this year.

The world’s most important central bank — the Fed (Federal Reserve) — shows clear signs of considering the need to anticipate and, perhaps, intensify monetary policy tightening. Not for nothing. The rise in US consumer prices in 2021 was the biggest in four decades, fueled by supply chain problems, labor shortages and strong fiscal stimulus.

Even if inflation cools down over the next few months as a result of moderation in commodity prices and reduced public spending, the danger of this scenario not materializing in the expected magnitude is not negligible.

The speed of the return of production chains remains unknown. Global industrial production has been picking up since last quarter, but the emergence of new variants is always accompanied by less mobility.

So far, freight prices remain high, as several inputs remain in short supply, putting at risk the long-awaited slowdown in industrial goods prices.

In Europe, pre-Christmas lockdowns have dampened confidence in short-term growth. In the US, estimates for first-quarter GDP have been revised downwards. However, the focus of attention is on Asia, a major global supplier of chips and industrial supplies. There, the numbers of infections remain low, but the fact that we know little about the effectiveness of Sinovac against the micron is worrying.

China, home to 7 of the world’s 10 largest ports, has operated a national “zero Covid” policy since the first wave and has already put 30 residential areas under lockdown. The Winter Olympics in February will see restrictions tightened.

At the same time, the US labor market continues to show signs that it could become a source of inflation in the medium term. The supply of labor has not kept pace with the increase in demand. The unemployment rate ended the year at 3.9% (below what the Fed sees as a break-even level), while wage gains came in at 4.7% from a year earlier — well above the pre-pandemic trend.

The risk that wages will continue to rise and that this increase will be passed on to prices is high, as even higher wages have not been enough to bring part of the professionals back into the job market. The labor shortage appears to be more structural and persistent.

Regarding commodity prices, even if the moderation scenario is confirmed, the inflationary impact of the green energy transition still seems to be underestimated. The need to intensify the fight against climate change may imply high prices for fossil fuels, if we really want to meet our carbon emission reduction targets.

There is a certain consensus that, this time, the repercussion of a stronger interest rate tightening in the US will not be so harmful to emerging countries, as their central banks are well ahead in the monetary tightening process. However, it is difficult to safely assume that the monetary credibility of these countries is well established, given their history of not meeting inflation targets and their fragile fiscal and external fundamentals.

Of course, the impact of increased global risk aversion depends on the economic policies of each country. Brazil has advanced in recent years to become a less vulnerable country, but unfortunately we have also gone backwards — especially in the last year. There is a clear perception that fiscal rules have been shattered, while demand for more spending remains growing.

The domestic consequences of external turmoil result from the reaction capacity of governments, which are often forced to implement unpopular measures. For 2023, the developments of a more hostile international scenario —combined with weaker fundamentals— will make it difficult to put the country on a sustainable path of growth and control of inflation.

Brazil needs a credibility shock, but maybe the Fed won’t allow us to wait that long inert. Everything indicates that candidates for the presidency will hardly be able to dodge the economic debate or underestimate the importance of market confidence, as they would have us believe.