On the Interest Rate and the Possibility of Changing the Inflation Goal of the Federal Reserve and t

At the last meeting of the Federal Reserve (FED) and as expressed in the final communiqué, the cuts in interest rates may begin not before next year. Analysts estimate up to three cuts of 25 points each that bring the rate to levels of 1.5% to 1.75%.

As mentioned in the newspapers and the International Information Agencies, that meeting was held after the European Central Bank (ECB) pointed out the possibility of a new monetary stimulus for the euro zone. Indeed, the global bond market was driven by the growing fear that economic growth is waning, and by the bets that the central banks of the USA, Europe and Asia will want to soften monetary policy to avoid another crisis. The resumption of commercial hostilities between North America and China caused concern among investors and caused the fall in bond yields.

This is the possibility that the ECB could reduce rates and resume its bond purchases if inflation remains well below the 2% target. These comments scared the fixed income markets and caused more bonds to enter the yield field below zero. Also if China and the United States do not initiate a durable setback of the escalation of global trade wars, the ECB will intensify its stimulus in the period july to september.

Large swathes of the European and Japanese sovereign bond market are trading with negative returns since 2.016. But recently, for the first time, the ten year yield on French and Swedish debt fell to less than zero. The equivalent German bond yield is -0.29%.

That intention of the ECB, was interpreted by the United States as an attempt to try to devalue the euro in an unfair manner which continues with public pressure on the FED to reduce rates (and devalue the dollar against the Euro) which has generated criticism for undermining its independence.

Last year, on the part of the FED there was a series of upward movements in the rate that took it to the current levels of 2.25% to 2.5%. However, the entity effectively changed to a position by saying in march that it would adopt a "patient" approach to changes in interest rates in any direction and as USA trade tensions increase, the FED is ready to act and sustain the expansion in the midst of that uncertainty.

The president of the United States cemented plans to meet with his Chinese counterpart at the G20 summit in Japan later this week, which increases the possibility of a new cycle of negotiations, after the breakdown of talks with Beijing on may, which led to an escalation of side and side tariffs. Meanwhile, they reached an agreement with Mexico on migration and reversed the possibility of imposing tariffs on the southern neighbor.

The dollar devalued against the main currencies after the FED showed willingness to lower interest rates in the medium term, to sustain USA economic growth. After the declaration of the FED the dollar asked for value against the Euro, the North American exchanges had gains as well as the Mexican markets.

With several years of expansive monetary policies according to analysts and international experts, aimed at countering the crisis of the year 2.008, the Quantitive Easy (QE) inflated the balance of the ECB to reach close to 5 billion euros in the acquisition of bonds. However, it has not been possible to achieve the objective of inflation of 2%, or slightly lower, and on the contrary inflation without food and energy (the volatile component) has fallen back below 1% in countries like Germany. In the last 8 years, inflation has only moved between 1.8% and 2% in 7 months.

Neither have inflation expectations reached since they have reached historical lows and move in the environment of an expected 10 year inflation of 1.13%, below the target.

Not only the ECB has to face insufficient inflation. The same happens with the FED in the United States. In effect, they are the challenges that they have to assume with an inflation that does not finish stabilizing in the goal of 2%. All this despite the fact that the economy grew by 3.1% (GDP) in the first quarter and the unemployment rate reached minimum levels in almost half a century of 3.6%. Inflation expectations in the United States are also deflating, and have fallen to their lowest level since the end of 2.017.

The foregoing is in line with the statements that international private investigative entities and experts have made over the last few years, who have pointed out that the inflation target of these two central banks must be modified because it may have become obsolete. The problem is that changing the inflation target could have negative consequences for central banks, mainly the loss of credibility.

There are proposals such as lowering the inflation target from 2% to 1.5% or an average of the prices of the last 5 years. This would make it easier for the FED and the ECB to reach their price target sooner and give them more room to cut interest rates in the event of a recession.

Other expert central bankers also propose that a flexible inflation target be adopted, through which inflation would be promoted above 2% during periods of economic expansion, to compensate for inflation below that goal during recessions.

Another possibility would be to adopt the goal of a range within which the inflation target moves, for example between 1% and 3%, similar to what exists in several Latin American countries.

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Today, in terms of world markets, stock markets and future preopenings are growing before the expected presidential meeting between China and the United States in the framework of the G-20 meeting that begins today in Japan, where global trade issues could fend off fears of a global economic slowdown.

The price of oil also rises before the possibility of greater demand for the commodity for this year. The WTI reaches 59.4 dollars a barrel (0.3% daily) and the BRENT 66.6 (0.5% daily).

In Colombia, the peso is trading early at 3.196 per dollar, similar to the TRM for today of 3.197.