How interest rates in the United States will influence Copom’s decision next week | Economy

In the middle of the May 1st holiday, there was not a Brazilian economist who was left out of the United States monetary policy meeting.

The decision by the Federal Reserve (Fed, the US central bank) would bring two pieces of news: one that would surprise no one, and another that would be decisive for work in the coming months.

• ▶️ The first: the Fed decided to keep the country’s interest rates unchanged, in a range of 5.25% to 5.50% per year, as was widely expected. In investors’ bets, the highest level of rates since 2001 should continue, at least, until September.
• ▶️ The second, and most important: the statement, in which the Federal Open Market Committee (Fomc) expressed its concern about the lack of progress in the US disinflation process. (understand below)

Brazil cannot take its eyes off this impasse in the USA: Higher interest rates in a developed country make emerging countries less attractive. And the increase in internal risk, since the change in the fiscal target, worsens the situation.

With the clues given by the Fed in hand, investors now await the signals that will be sent by the Monetary Policy Committee (Copom), on May 8th.

The Fed has stalled in its fight to bring American inflation to the target of 2% per year. At the worst moment, in 2022, the indicator exceeded 9%. But, since the beginning of the year, the deceleration in prices has remained at around 3%, despite interest rates being at the highest levels in 20 years.

In this Wednesday’s statement, in which it decided to keep the interest rate unchanged, the North American BC emphasized its concern about the country’s inflation.

“In recent months, there has been no new progress towards the 2% inflation objective”, reported the collegiate, reinforcing that recent indicators of the North American economy continued to expand “at a solid pace”.

The Fed indicated, therefore, that the US interest rate level was not enough to build confidence in the fall in inflation in the first months of 2024. This maintains a scenario of doubt in the market regarding when cuts in the country’s interest rate benchmark may occur. .

Since the Fed’s last meeting in March, new data on the North American economy were released that indicated a heated job market and even a reversal of the country’s inflation trajectory. This is important information that makes the US Central Bank afraid of cutting the country’s interest rates.

The main data came on April 10, with the release of the US consumer price index (CPI).

Against financial market expectations, consumer inflation accelerated and reached 3.5% in March, compared to 3.2% recorded in February. This rebound took away the “comfort” that the Fed demonstrated at the beginning of the year to begin its cuts.

Not surprisingly, in an interview with journalists this Wednesday, Fed President Jerome Powell stated that it will probably take longer than expected for US Central Bank authorities to gain the confidence necessary to begin cutting interest rates. fees.

“Inflation is still very high,” Powell said. “Further progress toward overturning it is not guaranteed and the path forward is uncertain. Gaining greater confidence is likely to take longer than previously expected.”

On the other hand, the Fed president said it was “unlikely” that there would be an increase in the US base interest rate in the next decision. According to him, the focus of the North American BC has been to maintain its current restrictive stance.

“I think it’s unlikely that the next move will be a rate hike,” Powell said, after being asked about the risks that interest rates would need to be raised to reduce the country’s inflation.

In the view of investors, the Fed president’s speech was less harsh than expected, even with a series of negative inflation data in recent months.

Powell’s comments turned out to be “notably less aggressive than many feared, aligning with the FOMC statement rather than attacking the market”, analysts at Evercore ISI pointed out, as reported by Reuters.

“The basic message was that the cuts were postponed, not derailed,” the consultancy continued.

Economist Francisco Nobre, from XP, highlights that the market reaction was “marginally positive”. “That’s because Powell has essentially ruled out the possibility of a rate hike for now. And 2-year US Treasury bond yields are down about 8 basis points,” he says.

When American interest rates are high, the profitability of Treasuries (North American public bonds), the safest in the world, is higher. Thus, those looking for security and good remuneration prioritize investment in the country, and stay away from emerging countries, such as Brazil.

With the flow of dollars directed to the US, the exchange rate worsens here — which, in turn, could complicate inflation.

For the chief economist of the Economic Analysis, André Galhardo, both Powell’s speech and the Fomc statement came in a tone as expected.

“Depending on the behavior of the labor market and the real estate market, inflation in the United States could remain high throughout the year. Then, there is a risk that interest rates will not be cut — which, to some extent, is already priced by the market”, he says.

Austin Rating’s chief economist, Alex Agostini, believes that the trend is for the North American Central Bank to remain very cautious and postpone a likely start of interest rate cuts until the end of 2024.

“In other words, the scenario is being confirmed that the interest rate in the United States should remain stable, at this level, throughout this year”, says the economist.

“This gives the Central Bank here in Brazil the certainty that it can reduce the interest rate next week by 0.5 percentage points, without changing its monetary policy strategy — which is 0.5 points now and , then 0.25 points”, adds Agostini.

In the economist’s view, the scenario therefore indicates a certain tranquility for the Brazilian Central Bank. His expectation is that the country’s basic interest rate, the Selic, will end 2024 at 9.50% per year.

Galhardo, from Análise Econômica, follows the same line. He believes that the Fed’s result this Wednesday will not demobilize the Copom to the point of reducing the pace of Selic cuts. The expert’s projection is that interest rates will end the year between 9.5% and 9.75%.

In addition to the effect of American interest rates on the Brazilian economy, there was a worsening in the internal risk situation, since the federal government announced a change in the fiscal target for the coming years. For 2025, the government proposed a zero fiscal target — instead of a surplus of 0.5% of GDP — and a reduction also for the coming years.

The financial market also understands that the decision opens space for more spending and less control over public debt, which demands higher interest rates so that foreign investors find the country attractive.

In addition to this issue, the Central Bank also monitors service inflation. It is a segment that has proven to be more persistent since the inflationary shock caused by the Covid pandemic.

Services inflation is very sensitive to labor market strength. Economists say that a smaller number of unemployed people and an increase in income without productivity gains could generate extra pressure on inflation.

Data from the Ministry of Labor and Employment show that Brazil created 244.3 thousand formal jobs in March, an increase of 25.7% compared to the same month last year. It was the largest generation of formal vacancies for the month of March since the beginning of the new Caged historical series, in 2020.

But underlying services — a core focused on services and excluding more volatile items — rose slightly stronger than the previous month, from 0.44% to 0.45%. It is a metric that the BC uses to check whether inflation is falling.

“The point of concern continues to be the underlying services, which, while remaining practically stable, remain at a level incompatible with inflation targets – and should continue to justify the Central Bank’s caution”, said the chief economist at B. Side , Helena Veronese, on the day of the announcement.

In short, what the Copom will seek to understand in its economic projection models is the size of the impact that the latest changes in the scenario will have on inflation expectations ahead. And this is the answer that analysts will look for, whether due to the surprise slowdown in the cut or between the lines of the statement.

With the decision, the statement and the minutes of the meeting, market agents will guide the readings to understand whether the country will need higher interest rates to continue attracting foreign investment.

A hint of concern and bad mood is already there: the BC’s Focus bulletin — a survey that monitors the projections of more than 100 financial institutions — raised Selic rate expectations for the end of 2024 to 9.50%. Before all this happened, it took about four months to project a final rate of 9%.