US Federal Reserve’s Policy Decision and Its Effects on Mexican Markets
In the financial world, what the US Federal Reserve (Fed) says can move capital. Last week, two significant events impacted the Mexican money market: the Fed’s monetary policy decision and the release of growth figures from Mexico’s primary trading partner, the United States.
Fed’s Policy Decision and Its Moderate Tone
The Fed’s Committee on Open Market Operations decided to keep the federal funds rate unchanged, awaiting the actual effects of the US’s new trade policy on consumption and the economy. Jerome Powell, Fed Chair, maintained a moderate tone during his explanation of the decision, calming global market volatility that day.
US Economic Growth Figures and Their Implications
The US Gross Domestic Product (GDP) grew by 3.0% in the second quarter of this year, indicating that economic activity remains robust. However, private investment has weakened, and job generation has slowed from May to July.
- May and June job creation figures were revised downward, with only 33,000 new jobs created and July’s figure at 73,000, far below estimates.
- Private investment saw a 15.6% trimesterly decline during Q2 of this year.
Given these figures, the Fed may adjust its reference rate at the next monetary policy meeting. According to the CME FedWatch market futures tools, there’s an 80% probability of a 25 basis points cut in September and a 20% chance of maintaining the rate unchanged.
Implications for Mexican Interest Rates and Exchange Rate
A rate adjustment can lower Treasury bond yields and strengthen the US dollar, leading to a higher peso-dollar exchange rate. This negatively impacts national imports and exerts upward pressure on inflation.
Complexity of Anticipating Interest Rates and Exchange Rate Movements
Predicting interest rate and exchange rate behavior is intricate. In a globalized world, no country exists independently. What happens in Washington reverberates through goods and services markets or financial assets markets.
Banco de México’s Reference Rate and Economic Factors
Given the above, it’s likely that Banco de México will keep its reference rate at 8.0% during the next monetary policy meeting on September 25. However, monetary policy decisions consider not only financial variable effects but also the impact of economic and public policy variables on prices for Mexico.
Economic Forecasts and Risk Management
Economists’ consensus anticipates moderate Mexican economic growth of 0.20-0.30% this year, inflation above 4.0%, and a peso-dollar exchange rate potentially surpassing 19 pesos per dollar, possibly closing the year near 20 pesos.
Have you factored these into your company’s operations? Are you aware of risk protection measures?
Financial Risk Mitigation Instruments
Fortunately, risk hedging financial instruments like futures or financial derivatives exist. These allow reducing the likelihood of a sudden shift in the currency market or interest rate trends. In Mexico, hedging operations take place at the Mexican Derivatives Market (MexDer), with banks or brokerage firms serving as the initial contact.
Staying Informed for Business Planning
So, the next time you hear about Fed or Banxico rates, don’t view them as distant data points. You might be reassessing your company’s growth projections.
