The Fed raises the interest rate 0.25 points in the US: why it matters and how it can affect Latin America - Start Up Gazzete
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The Fed raises the interest rate 0.25 points in the US: why it matters and how it can affect Latin America


The “era of cheap money” has begun to be left behind.

The Federal Reserve of the United States (Fed) announced this Wednesday an increase in the interest rate for the first time since 2018.

The 0.25 percentage point increase marks a shift in Fed policy that had kept the cost of money near zero since the start of the covid-19 pandemic.

With the decision, rates in the US remain in a range between 0.25% and 0.5%.

The measure seeks to cushion the rapid increase in inflation that has climbed to 7.9% , the highest level in that country since 1982.

Interest rates were at record lows since March 2020 to try to stimulate economic activity and get out of the recession created by the impact of the pandemic faster.

But now, with the war raging in Ukraine and expectations that the cost of living will continue to rise in the US and the rest of the world, higher interest rates, analysts say, were all but inevitable.

“We are keeping an eye on the risks of further upward pressure on inflation,” said Jerome Powell, chairman of the Fed.

“The US economy is very strong and well positioned to handle tighter monetary policy,” Powell added.

The Fed’s announcement is seen as the beginning of the end of an era when borrowing money from banks was very convenient.

In fact, the hike announced on Wednesday is likely to be the first of several this year, analysts say, as the Fed said “continued increases in the target range will be appropriate.”

Jerome Powell
Jerome Powell, Chairman of the US Federal Reserve, announced the first interest rate hike since the end of 2018.

With two years of low global rates, people, investors and countries that took on debt gained access to cheaper dollars that incentivized them to consume or invest, kick-starting the stalled engines of economic growth.

But now things have changed. And although inflation was already skyrocketing since before the war in Ukraine began on February 24, the conflict has put much more pressure on the countries.

Because it is important?

It is important because the cost of borrowing money has a direct effect on people when they take out credit (such as mortgages or consumer loans) or pay off debt.

It also affects companies and governments that require financing to make investments or renegotiate financial commitments.

The decisions of the Fed, equivalent to the central bank in other countries, are essential for the direction of the economy. Higher rates control inflation, but at the same time, they reduce economic growth .

That is why an increase in interest rates is part of a complex dilemma: is it better to control inflation and affect the pace of growth, or is it better to keep the engines of growth running despite the increase in the cost of living.

Consumidores estadounidenses afuera de un supermercado
The increase in the interest rate seeks to control inflation.

Historically, movements in US rates, even by a quarter point, have global repercussions.

Investors move their capital from one country to another, the stock markets are shaken and the rest of the central banks make decisions guided by the direction followed by the world’s largest economy.

How does it affect Latin America?

The Fed’s decision has the potential to affect the lives of millions of people across the developing world.

“The fact that the United States raises interest rates affects Latin America a lot,” Juan Carlos Martínez, professor of Economics at the IE Business School, Spain, tells BBC Mundo.

“There is more risk that capital that was invested in Latin America will go to the United States, causing a depreciation of local currencies and higher inflation,” stimulated precisely by this loss of value of the currencies of the countries against the dollar.

Traffic light and flags on Wall Street
The Fed’s rate hike is an incentive for investors to move capital to the US in search of higher returns.

That is why many fear that the Fed’s decision will accelerate an outflow of capital from the region to that country, seeking higher returns.

This is explained because if large investors consider that buying US bonds (the debt issued by the country to obtain financing in the markets) is more attractive, then they lend less money to the countries of the region or “buy debt” at interest. Taller.

The same happens with large companies that get external financing: the cost of borrowing goes up.

And, on the other hand, a higher dollar decreases the purchasing power of people, for example, when buying imported goods .

If the central banks of the region want to prevent capital from emigrating to the United States, “what they have to do is aggressively raise interest rates. The problem is that higher rates are a brake on growth,” explains Martínez.

Woman cooking in Buenos Aires, Argentina
Both inflation and interest rates have skyrocketed in Latin America, especially affecting lower-income families.

A challenging scenario when interest rates are currently very high in a Latin America that is still hit by the traces of the pandemic, with job losses, low growth, fewer fiscal resources due to extraordinary expenses made during the recession and runaway inflation. .

Analysts anticipate that a time of “more expensive money” is beginning and, with the uncertainty caused by the war in Ukraine , expectations point to the fact that 2022 will probably be a year of progressive increase in interest rates in different countries of the world.

This uncertainty caused by the war makes capital try to take refuge in the dollar, a strong currency, contributing to the appreciation of the greenback against other currencies.



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  • BBC News World
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Joshua Smith

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