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Fed set to continue rate hike 75 points after CPI, experts say

THE inflation us United States changed 0.1% in August, above the market forecast, which expected deflation of 0.1% in the period.

Although the result has frustrated the forecasts of greater relief in prices, the move should not reflect, according to analysts, in a more aggressive monetary tightening by the Federal Reserve (Fed, BC of the USA) in the next meeting, on September 21.

“Today’s reading should not change the next steps of monetary policy, which should confirm a rise of 75 basis points (0.25 pp) at next week’s meeting. For the market, however, the data frustrates expectations that inflation would be controlled more quickly and monetary tightening, even after reinforced by the Fed, would not be necessary in such intensity”, said Rafaela Vitória, chief economist at Inter.

“The data today shows that we still have a scenario of great uncertainty and inflation is still a problem that requires higher interest rates in developed countries,” he added.

After the release of the US government report, showing that consumer prices did not fall as expected in August, futures contracts linked to the Fed’s benchmark interest rate fell.

The move could be interpreted as confirmation that the Fed will deliver at least a 75 basis point increase next week, with a slim chance of an even larger (1 percentage point) increase.

“The data consolidates the scenario of a 3rd consecutive increase of 0.75 pp by the Fed, but there is some risk of less than 1 percentage point”, says Marco Caruso, chief economist at Banco Original, who believes that there is a possibility of a more aggressive increase in interest rates by the FOMC (Fed’s monetary policy committee), although the market consensus is for a 0.75 point hike.

Disinflationary process may continue

According to Francisco Nobre, economist at XP, despite the August result having indicated price resilience, the disinflationary process should continue to advance.

For him, markets are “almost fully priced”, with the Fed likely to increase another 0.75 percentage point next week.

“We believe today’s CPI print will force them to deliver 75 basis points instead of 50 bps, which we think is a mistake considering the risk of a lagged effect of monetary policy on the economy and the still very uncertain economic outlook.” said.

“In any case, a more aggressive decision in September does not necessarily change the level of the terminal interest rate. We still assume the terminal Fed Funds rate will be 3.5%, not 4% as the market is currently pricing. In addition, we continue to see room for rate cuts from Q4 2023 onwards due to slowing economic activity and significant disinflation. We expect the Fed to reach neutrality at 2.5% in the first quarter of 2024.”

XP projects core CPI ending 2022 at 6.4%, while core at 5.4% (previously 6.2% and 4.9% respectively). For 2023, headline inflation is expected to end the year at 2.9%, while core inflation is expected to be 2.8%.

Marco Caruso, chief economist at Banco Original, believes that there is a possibility of a more aggressive increase in interest rates by the FOMC, although the market consensus is a 0.75 point increase.

“The data consolidates the scenario of a 3rd consecutive increase of 0.75 pp by the Fed, but there is some risk of less than 1 percentage point”, he highlighted.

Impacts for Brazil

The result of American inflation in August and the Fed’s next steps impact the daily lives of Brazilians, although the news may seem distant, according to Rico Investimentos economist Rachel de Sá.

According to her, despite the higher-than-expected increase, inflation is starting to show signs of slowing down. As the monthly result indicates, despite the rise in services and imbalances still present in the global energy sector, the fall in the price of certain commodities (such as food and fuel) and industrial products – given the improvement in global production chains – has helped to reduce the pace of inflation in the USA. And similarly, in the rest of the world.

“We also ‘import’ part of the inflation of American goods and services. The United States is our second main trading partner, from whom we import various products and services, such as machinery and equipment and technology and communication services. So, the higher the inflation there, the higher the inflation of the products we import here – impacting our inflation.

The economist pointed out that rising interest rates in the United States mean less liquidity for markets – that is, less money in search of returns in the world, in addition to reducing the relative attractiveness of assets in riskier countries, such as Brazil.

“In this way, the course of interest rates in the United States also impacts our interest rates here, especially those determined by the relationship between risk perception and market demand – long-term interest rates, which have such an impact on the lives of companies and families in the country. ”, he concluded.

Source: CNN Brasil

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