Although the Fed’s monetary decision was discounted, this does not reduce the complex environment faced by its monetary peers around the world with said decision.
As widely expected by the market consensus, the Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) made the decision to increase the federal funds rate by 25 basis points to place it at a range between 0.25-0.50 percent.
With this, the expansionary cycle of practically two years has ended, opening the window to a normalization of its monetary policy.
In line with the dual mandate of the Fed, the statement mentioned that the main indicators of economic activity and employment have continued to strengthen, noting that the unemployment rate has decreased substantially.
However, inflation continues at high levels, not seen in the US economy in decades, mainly as a reflection of supply and demand imbalances related to the pandemic.
Regarding the unfortunate war situation between Ukraine and Russia, it was mentioned that the human and economic damage is of enormous magnitude and that its implications for the US economy are uncertain, but in the short term it is likely that the invasion and related events will create a upward pressure on inflation and will spill over into economic activity.
In this sense, it was necessary for the central body to update its economic projections (its last update date was December 2021) in order to strengthen its communication with the market and signal commitment not only through increases in its rate of reference, but also recognizing the complexity of the current economic situation.
In this context, he highlighted that, within the projections, a slowdown in GDP growth is estimated for 2022 (2.8% from 4%) and substantially higher inflation levels for the same period (4.3% from 2.6%).
Although the measure of publishing estimates contributes to strengthening the expectations channel and gives robustness to the institutional profile, it highlights the breadth that exists between the ranges provided by the members of the FOMC.
This reflects that, even within the central body, uncertainty prevails.
Although the Fed’s monetary decision was discounted, this does not reduce the complex environment faced by its monetary peers around the world with said decision.
Banco de México, whose Governing Board will meet on March 24, is facing a very challenging situation: continuing its cycle of hikes in order to ensure the anchoring of medium- and long-term expectations is necessary. However, the reference rate is dangerously close to restrictive territory, which could represent a drag on the already deteriorated outlook for economic recovery, which is not only modest but frankly very poor.
Since the historical fact of the pandemic made an appearance in the world, the Mexican central bank has been characterized by conducting its monetary policy in a timely, gradual and responsible manner. However, there are two factors that are particularly relevant in this context.
On the one hand, most of the shocks that have affected the price formation process are supply shocks, so the effects of monetary policy to control short-term inflation are limited.
Second, monetary policy should be complemented by an appropriate fiscal policy that is capable of accentuating its benefits and creating the necessary conditions to generate growth and, more importantly, economic development.
Going forward, the scenario for inflation looks bleak; Not only are the bottlenecks around the world not giving way, but a new pressure is threatening the price level: the aggravation of geopolitical tensions.
If the foregoing were not enough, the underlying component of inflation —the one that excludes goods and services of a more volatile nature— has not given any sign of weakness, which could open the possibility to the fact that the shocks caused by the pandemic have transferred to a structural level, a situation that represents a major challenge if we speak in terms of well-being, since the increases in the price level are especially harmful for the most vulnerable population by income level.
Given the complexity of the situation, we forecast that inflation in Mexico will not drop below 5% throughout the year. Our estimate indicates that the general index would close 2022 at a level of 5.36 percent.