June 26, 2022

Q1 Central Bank raises US interest rates amid GDP fall: Does it make sense? – Comment


Champions who do not raise interest rates due to supply shock should be buzzing, but I do not know why. We have already learned in introductory economics classes that prices are formed by a combination of supply and demand. Of course, some support a little more inflation to sustain economic growth. In the long run currency neutrality they missed the second class. Patience.

But let’s start with the facts.

The The Federal Reserve rose 0.5 percent yesterday. Its core interest rate was a way to mitigate the impact of the ongoing shocks of the Kovit-19 epidemic, Russia’s invasion of Ukraine and the lockdown imposed by China, the latter limiting exports of important inputs such as semiconductors. For the production of drones, tractors, electricity and electronics for agriculture.

However, this decision, in principle, goes against previous economic data, which showed a decline 1.4% of GDP in the first quarter of 2022 On an annualized basis, after a 6.9% increase in the last quarter of 2021.

But why did the Monetary Commission raise interest rates in the midst of a quarter-quarter fall?

Economists often try to explain what is not obvious with dubious facts, but in this case, economics students will understand. If we break US GDP in the first quarter of the year, we will notice that consumption and investment in GDP increased by 2.7%, up from 2.5% and 9.2% in the 4th quarter of 2021. In the previous quarter respectively.

The question remains, however. So why the fall in GDP?

Now, if we analyze GDP from the demand side, considering that it is an open economy, the main reason for the decline of the North American economy is the increase in imports. Since imports are considered to reduce GDP, we consume goods and services from abroad, and do not produce domestically (GDP), which may lead to the misconception that the US economy is really losing momentum.

Nothing more than the truth. First, the main factors affecting imports: exchange rate and domestic income. The valuable exchange rate makes importing goods and services more favorable, and the increase in domestic income leads economic agents to import savings as a way to satisfy their consumption desires. Hence the misinterpretation of the summary of the American economy.

Based on this brief diversion for graduates, and taking into account annual inflation of 8.5% per annum, there is nothing more sensible than the central bank still adhering to. Hawk [mais dura com relação à inflação] At meetings of the Federal Open Market Committee (FOMC), it was unanimously approved to raise the base rate to 0.5 percentage points.

You can also read: Analysts say US GDP is not as bad as it looks and should not change the central bank’s rate hike forecast

For now, at least on the surface, the market has not yet been able to estimate how much the Fed will pull rates by the end of 2023, perhaps as high as 3% or 3.25% of the yield curve price. We know better when the US yield curve is reversed (the market will figure out how far the federal goes) or when it will continue to equalize.

The benchmark decision to raise interest rates and reduce its balance sheet by selling government securities and mortgage support securities (MBSs) reduced the cash flow of the economy to $ 47.5 billion a month, raising sales to $ 95 billion in three months. Now, it will take more than $ 710 billion out of circulation in 12 months.

However, given the slowdown in US gross domestic product in the first quarter, the Fed’s expectations of an increase of only 0.25 points at the last meeting are not expected to confirm the final outcome. Hawk Of the Confederacy

In fact, the complete opposite. Although the yield curve has already set the interest rate at around 3% -3.25% by the end of 2023, believing in a major upheaval in monetary policy does not seem to have been completely ignored, which will certainly lead to the reversal of economic agents. The property rotation process began earlier this year.

In other words, change the process of investing in freight-exporting countries and return to the safe haven of the United States by investing more than $ 25% of the profits made in Brazil in US TIPS or Treasury Inflation Protected Securities.

Therefore, avoiding the high octane levels of the upcoming elections, which could cause further fluctuations in our currency (which would cause the same investors to lose a portion of the huge profits in Brazil). It needs to be reflected.