October 18, 2015    3 minute read

The FED and Uncertainty: With Great Power Comes Great Responsibility

   October 18, 2015    3 minute read

The FED and Uncertainty: With Great Power Comes Great Responsibility

The last few months have been quite a nightmare for the Federal Reserve’s pursuits to increase interest rates. Every time there seems to be a sign of hope on economic recovery and the possibility for the FED to raise interest rates without fearing to damage the U.S. economy becomes plausible, new figures on U.S. jobs growth rates are reported and all confidence is lost in a moment. Not incorrectly assuming that the FED does not feels comfortable increasing interest rates, given the current state of the economy, then the question to ask here is, what is the FED’s idea of the ideal moment to increase interest rates? Regardless of what this might be, they might probably want to consider taking into account the effect of their decisions on other economies, especially developing economies.

Take for example the case of the Mexican economy and its susceptibility to changes in U.S. monetary policy. Figure 1 is a plot of the exchange rate between the U.S. dollar and the Mexican peso. In the last months the Mexican peso has depreciated around 13%, thus, reaching the highest exchange rate in decades. Might this be a sign that the global economic environment has significantly changed within the last few years and the decisions taken by major economies have now a bigger impact in other economies?

 

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Figure 1:  U.S. dollar against the Mexican peso (Source: Yahoo finance)

 

Up to the present day, the Mexican peso as well as other Latin American currencies continue being subservient to  the FED’s ability to postpone decisions, loosing strength within the process. With the region’s economic outlook deteriorating rapidly, expectations that Latin America’s economy will recuperate this year are not on the table. Lets hope the FED sets these currencies free in a near future and, once being free, they have still the strength to walk the right way home.

The decision of the Federal Reserve of when to increase the interest rate is defining the path to follow by many economies around the globe. This holds for developing as well as developed economies, as it is the case of Europe. With an average growth of around 0.25% for the second quarter of 2015 within the Euro area, an increase in interest rates by the FED might prevent European countries to continue their way to recovery. Out of any clear sign of global economic recovery the only thing that remains is to hope the FED’s shoot will hit in the right place and in the right moment, without causing too much damage on its way, and to remember her that with a great power comes a great responsibility.

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