Powell says 50-point interest rate hike ‘on the table’ for Fed meeting

U.S. central bank governor Jerome Powell said a 50-percentage point interest rate hike would be “on the table” when the Federal Reserve meets on May 3-4 to approve this year’s next hike. . Powell also signaled that a series of half-point increases may be needed in an aggressive set of Fed actions.

​In March, the US monetary authority raised interest rates for the first time since 2018, by 0.25 percentage point, to a range between 0.25% and 0.50% per year.

The movement, however, is far from enough. Officials of the monetary authority defend a rate of around 3.5% until the end of the year, to try to contain high inflation by the country’s standards – the consumer price index in the United States reached the mark of 8.5% in March, the highest since 1981.

With inflation well above the Fed’s 2% target, “it’s appropriate to move a little faster,” Powell said in a discussion of the global economy at IMF (International Monetary Fund) meetings. “Fifty basic points will be on the table for the May meeting.”

The Fed chairman also said he felt investors currently anticipating a series of half-point increases were “reacting appropriately, in general” to the Fed’s emerging fight against rising prices.

Market agents who trade U.S. interest-linked contracts expect the Fed to raise interest rates to a range between 2.75% and 3% by the end of the year, a pace that would involve 0.50 percentage point hikes in the three upcoming meetings and 0.25 point increases in the other three sessions of the year.

“We’re really committed to using our tools to get inflation back,” Powell said, acknowledging that the Fed’s hope that inflation would decline during the reopening of the pandemic has been misplaced so far — to the point that the Fed no longer counts on the Fed’s help. improving global supply chains, for example.

“We had an expectation that inflation would peak around this time and fall over the rest of the year and beyond,” Powell said. “Those expectations have been disappointed in the past. We want to see real progress. We’re not going to rely on supply-side healing to help. We’re going to raise rates and quickly get to more neutral levels, and then higher if necessary.”

Signals from the Fed of a tougher stance against inflation transmitted to the market cause stocks to operate lower on US stocks this Thursday (21), as higher interest rates tend to cause a slowdown in the pace of activity. economic.

At around 4:40 pm, the S&P 500 stock index was down 1.30%, while the Nasdaq was down 2.12% and the Dow Jones was down 1.07%. The Stock Exchange in Brazil remains closed this Thursday due to the Tiradentes holiday, resuming operations on Friday (22).

Impact for Brazil

The US Federal Reserve’s focus is on US domestic inflation. Already the side effects affect investments of people and companies all over the world. And that doesn’t just affect the lives of investors and entrepreneurs. Jobs, wages and the value of the supermarket bill of workers, including Brazilians, are at stake.

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.

The tightening of monetary policy in the United States reduces the chances of shares of companies listed on the Brazilian stock exchange to be bought because, simply, there is less capital available. But not only that.

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.

The rise in US interest rates also affects the exchange rate. Foreign investments in Brazil, whether in the equity or fixed income market, bring dollars into the country. If less money enters, it becomes scarcer and its value against the real tends to rise.

The appreciated dollar is a potential generator of inflation in Brazil because it makes it more expensive to import machinery and components used in local industry, in addition to various consumer items.

Basic materials exported by Brazilian companies abroad are also priced in dollars. The oil produced by Petrobras is the best-known example. The higher price paid in dollars for commodities abroad also makes these products more expensive for consumption here in Brazil.

The growth of exports may, eventually, favor the inflow of dollars into the country. This depends on where the exporters decide to invest the gains from sales in the foreign market. This is where politics becomes important.

A troubled political scenario, with threats to the functioning of democratic institutions and aggressive government interference in the financial market, scares investors away.

There is consensus among analysts that the fear of this type of instability drove away investments from Brazil last year, even with a favorable context abroad due to the expansionist policy of the United States and other major global economies.

In 2022, the year of elections in Brazil, investors are especially attentive to measures that can increase public spending.

High expenses make it difficult to execute the Budget, such as investments in infrastructure, payment of Union debts and other actions planned by the government in the previous year. It’s called fiscal risk.

More risk means less willingness on the part of investors to invest in Brazil and in Brazilian companies, as they consider that conditions are unfavorable for the growth of the domestic market.

The lack of liquidity abroad makes the game difficult for Brazil because, with less capital, investors want more security and greater profits when deciding where to invest.

with Reuters