The lingering ghost of stagflation

Last week there was great expectation before the meeting of the Open Markets Committee of the United States Federal Reserve to know if it would make changes in its monetary policy that would allow inflationary pressures to be controlled

In recent times, the focus of the markets has been focused on the inflationary pressures that have been felt in the economy and the way in which central banks are, or will be dealing with this issue, which today with the new economic senton and The strong outbreaks of Covid-19 in Europe and China, generate renewed concerns about the possibility of a stagflation phenomenon, which means inflation without economic growth, without a doubt, a scenario that nobody wants to see in their economy.

As is known, in the face of the current crisis, governments decided to apply the same medicine that was applied in the 2008/09 crisis, that of injecting large amounts of resources into the markets in order to reactivate the consumption that is the engine of the main economies like the US. Unfortunately the nature of the current one differs greatly from the previous one.

In 2009 we had a crisis in the financial sector caused by the famous subprime or high-risk loans, particularly granted in the mortgage sector.

Today’s crisis is caused by a pandemic that caused a large part of the world’s economic activity to stop, to change the way of working by doing it now from home, and in the middle many jobs were lost, and the chains were interrupted productive, which today has come to generate a shortage of various essential products for various industries, and since they are not available in the markets, their prices rise due to the limited supply of them.

To the above, we should add the enormous amounts of money that were injected into the markets and the economy, where on the one hand, and given the uncertainty of the duration of the pandemic, people were much more conservative in the use of those resources, while on the other hand, hedge funds took advantage of the cartloads of money to invest in the markets in raw materials that were at very attractive prices, such as energy and grains, among others, which in turn, in the cash market have generated inflationary pressures due to the high cost to which they have been driven.

In my opinion, the same medicine cannot be applied to two conditions of different origin. We will have to see what the result is.

For now, last week there was great expectation before the meeting of the Open Markets Committee of the United States Federal Reserve to know if it would make changes in its monetary policy that would allow inflationary pressures to be controlled, and then listen to the message of its president , Jerome Powell, to find out how they are going to move forward.

And as was expected by all, the Fed began to reduce the purchase of assets for 15,000 million dollars per month to conclude in June 2022, that is, it will be injecting fewer resources into the market, and for now, it left the rate benchmark unchanged at levels from 0 to 0.25 percent.

The Fed continues to think that the current inflationary pressures are a transitory phenomenon and Powell declared that they will not only be aware of the evolution of the economy and inflationary pressures, but also of the recovery of jobs and their remuneration.

The 2009 crisis made it very clear that at any moment inflationary pressures can cause the Fed to raise its rate and that loans go from cheap to unpayable.

For now, we will have to be careful that we do not have a strong wave of infections due to the winter season that discourages growth and delays again the integration of the chains, making the ghost of stagflation persist.

In Mexico, Banco de México has already raised its benchmark rate, yet high prices persist and we have already seen signs of an economic slowdown.

All of the above results in volatility in exchange rates, interest rates, debt and commodity markets.

We will have to wait whether or not we are facing a transitory phenomenon, but for now, the specter of stagflation persists.

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Reference-www.eleconomista.com.mx

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