The name Jerome Powell may not sound familiar to you, but he is the person on whose shoulders much of the world’s economic stability falls. Powell is the Chairman of the US Federal Reserve (FED), and yesterday with the serious face that distinguishes him, The world reported the largest price increase in 28 years.
Specifically, the Fed raised interest rates by 75 basis points: from the 0.75% to 1% range, it went to one between 1.50% and 1.75%. It seems like a small fact, but in a few months it could cause this to happen You have to pay more expensive to get credit; Investors who have capital in the country prefer to immigrate to the United States Or the dollar becomes more expensive.
Before explaining why, it is important to say that the Fed made this decision because inflation or the rising cost of living in that country has gone up more than expected. In the past 12 months (until May) it has reached 8.6%, which we haven’t seen in four decades.
As interest rates rise, the demand for credit – and at the same time consumption – is discouraged and the rise in prices begins to diminish. However, there is a significant fear that these adjustments will dampen US economic activity.
This, combined with inflation at significant levels, can lead to a recession, which is technically defined as A decrease in gross domestic product, gross domestic product, for two consecutive quarters.
We care so much
Returning to the effects of the interest rate hike by the Federal Reserve Bank of Colombia, it should be noted that since this entity is almost a mirror of the central banks of the world, Banco de la República will follow the same path and raise interest rates, which is something with which it can and will also seek to address Inflation in Colombia, which today exceeds 9%.
This was confirmed by an analysis by Carolina Altamiranda, of the Young Researchers Program at the University of Externado School of Economics, who stated that the Banrib Scale It will affect SMEs’ access to credit.
The expert adds that the (external) debt will continue to grow, as higher interest rates by the Federal Reserve increases the loans of debtor countries. He also points out that this decision would cause large portfolio investments in Colombia to migrate to the United States, where investors get more profits.
Moreover, some experts believe that the Fed’s decisions are directly related to the exchange rate, and A more expensive dollar would lose sectors that require a high level of importssuch as agriculture, which requires external inputs whose prices are already high.
Although the Fed’s hikes will continue and Powell confirmed that in July there will be another 75 basis point adjustment, it is also important for Colombia to assess the effects of a possible recession in the United States.
Economic analysts such as Luis Fernando Ramirez, a researcher at Sergio Arboleda University, say that if this happens, one of the negative effects is that the world’s leading power will begin to reduce its purchases from other countries, and Colombia, which has the United States. As the main trading partner will export smaller quantities; for example, You will not take full advantage of good oil prices expected in the coming years.
Knockout effect would reduce national economic growth and The current account deficit increases, that is, more dollars are left with more dollars. In addition, the lower dynamics of the United States would reduce the remittances that Colombians send abroad to their relatives (see ‘Background’).
Far from being a rumor, an economic recession of the world’s leading power is very likely. A survey conducted by the Financial Times, in conjunction with the Global Markets Initiative at the University of Chicago Business School, revealed that 70% of leading academic economists expect this scenario to occur in the next year.
The study also included that 21% of 49 respondents think the recession will arrive between July and September 2024. In addition, they were asked if the Fed could control inflation and what actions it would require to do so, to which 40% answered that they would not be able to do so unless they raised interest rates to 2.8% by the end of this year, which could It means more aggressive policy and closing the tap on economic stimuli.
While closely monitoring this situation, Colombia’s priority is to control inflation, which, according to Banco de la Republica, will continue to suffer due to the Fed’s rate hike and the blow of the Russian-Ukrainian war on raw materials prices. However, the director of the bank, Leonardo Villar, gave a calming message and indicated that the situation would begin to calm down, although it was “extremely worrying”.
Uncertainty is at an all-time high in the world and tension in the US is only the tip of a spear as concerns about price hikes or economic stagnation are rife in almost all countries. Below we compile the diseases plaguing the global economy today (see modules).
Increasing nutritional stress
According to the Food and Agriculture Organization of the United Nations (FAO), food prices are at record levels this year. In May, grain and meat prices rose affecting importing countries, which will pay a record $1.8 billion price for food in 2022, although they will receive fewer products. This is added to increases like those in energy and will lead to global inflation of 6.7% this year, according to the United Nations.
Banks raise rates and raise them
The increase in interest rates is not only apparent to the United States or Colombia. In the midst of the pandemic, the world’s central banks have lowered interest rates to give the economy a “lifeline”, but since last year they have been introducing a policy of “normalization”, that is, returning them to where they were. With the price hike, the price hike was stronger than expected. Argentina, Brazil and Chile are among those with the most significant increases.
Consumption: now not so good?
Although private consumption has restored dynamism to economies such as the United States or Colombia after the pandemic, its high growth now presents a dilemma given that rising demand has a greater impact on inflation. In this sense, the measures taken by the central banks are aimed at reducing household spending, and the expectation is that this will happen from the second half of the year, although that should slow the economy. The positive side is that this would restore people’s savings.
Investment can slow down
Uncertainty causes companies to become more cautious and start making decisions such as reducing investment or staffing. For example, BlackRock, the world’s largest investment manager, announced that it will no longer invest in the stock market for the next twelve months, given the losses suffered by the US market. Tesla, for its part, had planned to lay off 10,000 employees before. Its leader, Elon Musk, feared recession.
The global economy will decline
All this prompted international organizations to be more pessimistic about the global economy. The International Monetary Fund, which previously believed it would grow by 4.4%, cut its forecast to 3.6%. The same was done by the World Bank, which revised its forecast to 2.9% from 4.1% previously forecast. Colombia appears to be a separate case, because instead of lowering its forecast, it is raising it and GDP could grow by more than 6%.