The resignation of Federal Reserve Director Lisa Cook’s Central Bank) by US President Donald Trump has brought concern to the market about the future of the driving of American monetary policy and the independence of the municipality. Lisa said he will appeal the decision and will not resign. The uncertainty about the case can have consequences for central and active banks throughout the planet. But why the discussions about the Fed move so much with the rest of the world? And what are the effects of a possible resignation at the municipality for US interest rates?
Felipe Sichel, Porto Asset’s chief economist, explains that decisions about interest in the United States often change global monetary policy. This is because an increase in US interest rates raises the attractiveness of fixed income in the US – considered one of the safest assets in the world – which leads to the growth of investment flow to the country. This movement tends to retain dollars in the US, raising the quotation of the coin globally.
The dollar, in turn, is an extremely relevant currency in the pricing of financial assets, especially in commodities, very important for international trade, ”says Sichel. That is, many commercial transactions between countries and many investments are backed in dollars. The appreciation of currency makes this trade more, which is passed on in the end consumer prices, which is reflected in more inflation, making the BCs have to raise interest to contain it.
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The opposite is also true: if Trump is able to fire Cook and lead the Fed to a monetary loosening – as he has been insisting since his inauguration – the rates around the world may fall.
Temporary effects on interest
But strong interest reductions in the US (as Trump wishes) will have inflationary effects in the future, warns Nomad chief economist, Danilo Igliori. He points out that the American economy has no room for large cuts, as inflation follows above the 2% target set by the Fed.
“If interest comes down in an exaggerated way, the price of this is inflation up front,” says Igliori. “If you say that you will lower interest now in the ward, as the hypothesis (Lisa’s resignation) causes, the result is more inflation, and thus it is very likely that the Fed himself has to rise the interest again.”
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This reasoning could be observed at the Yields Curve (Yields) of the American Treasury titles, the Treasuries on Tuesday. The shorter yields – like 2, 5 and 10 years old – retreated, while the longest – like the 20 and 30 years – rose.
Problems in Confidence
Ian Lima, fixed income manager of Inter Asset, explains that one of the main points of the market seizure with Trump’s movement is how it will affect the independence and credibility of the American BC.
“What happens is that this affects confidence in the Fed, confidence in monetary policy, you have no predictability in the Central Bank. We can project what will happen in a meeting because of recent data, because the Fed makes decision in a technical way. Since the Central Bank is no longer independent, it generates an unpredictability. This can generate uncontrolled.”
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On the other hand, Nomad’s Igliori signals that new directors indicated by Trump can act in a technical way, even though the current process is turbulent. In addition, there is a possibility that the president – known for turning back in various decisions – giving up the idea of firing Lisa.
This perspective caused the market to react with some calm: the commercial dollar ended 0.34%, at R $ 5,433, while Ibovespa fell 0.18%at 137,771 points.
Lima, from Inter, states that noises between BCs and governments have always existed and that it is not the first time a president complains about high interest rates. But warns:
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“If there is (Fed interference) it can shake the structure of something that has always been reliable.”
