Last week we learned the minutes of the latest meetings of the Federal Open Market Committee of the Federal Reserve (FOMC) of the United States and the Governing Board of the Bank of Mexico.
In the case of the Fed, the relevant thing is the following:
to. The members of the Committee do not have enough confidence to initiate a cycle of reduction in the target of the federal funds rate, which is the Fed's reference rate and which currently and for a year has been in the range between 5.25% and 5.50%
b. The members observe that the latest data known up to the date of the meeting show an economy that remains at full employment, with robust economic activity, with a very strong domestic market, and with strong inflation pressures, both internal and external.
c. Members decided to maintain the target range for the federal funds rate and anticipate that it will remain intact until there is strong evidence that inflation is slowing toward the inflation target, which remains 2%.
d. Some members think the neutral rate has increased from the 4.92% calculated two years ago.
and. Some members do not rule out that if inflation continues unabated they will have to increase the federal funds rate target again.
F. Given the expectation of higher interest rates for a longer period of time, there is fear that more financial institutions will suffer instability events, which is why the Fed decided to reduce the pace of contraction of the money supply by $95 billion per month. to 60 billion dollars.
Inflation in the United States had been on an upward trajectory for six continuous months. On May 17, consumer inflation was released, headline inflation moderated to 0.3% in April from 0.4% previously; In its annualized rate, the indicator stood at 3.4%, also showing a decrease from 3.5% the previous month.
In core inflation, the subindex fell to 0.3% at a monthly rate, in line with expectations and falling from the previous 0.4%. In its annualized variation, core consumer inflation registered a level of 3.6% in April, falling from 3.8% in March. These data generated several days of euphoria in global financial markets, but the possibility that some members of the FOMC were willing to raise rates generated important profit taking.
In the case of the Governing Board of the Bank of Mexico, what is notable is the following:
to. Since the decision was made to reduce the reference rate for the first and only time, from 11.25% to 11.00%, inflation has not stopped rising.
b. In the analysis of inflation, a member of the Board noted that since last October the downward trajectory that general inflation had since September 2022 was interrupted.
c. The majority of the Board stressed that the recent increases in general inflation have been due to the increase in the non-core component.
d. As of March, the annual increase in the salary of workers insured in the IMSS was around 10%, while contractual salary revisions for private companies were at 9.4%. The increases in real wages are of a magnitude that has not been seen for many years.
and. Without minimizing the increase in general inflation, the upward adjustment is due to the non-core component.
F. The non-core component is usually affected by supply shocks, the effect of which tends to dissipate quickly.
g. The majority of the Board highlighted the decrease in merchandise inflation. One member highlighted that they have accumulated 17 consecutive months of decline.
Regarding non-core inflation, the majority of members indicated that it reached 5.54% in April. Some indicated that this reading is close to its historical average.
h. Interest rates on government securities increased by up to 44 basis points in the medium-term segment, while in the long term they increased up to 32 basis points.
Yo. Given the persistent inflation, the members of the Governing Board perceive that the convergence of inflation towards the inflation goal of 3% per year seems distant, towards the end of 2025.
j. Faced with these circumstances, the Governing Board made, for the second time, the decision to keep the reference rate intact at 11.00% annually, but with a divided vote, two members were against the reduction and the remaining three voted in favor. favor.
The final conclusion leads us to reiterate that global and national inflation remain high and that it will be difficult for monetary policy decision-making bodies to decide to reduce reference interest rates in the following months.
