Some Lessons of Monetary Policy in the Case of the FED and the Banco de la República.

Inflation in the United States for the month of march was 3.5%, higher than that of february of 3.2% and that of last december of 3.4%. It rose a few points compared to february and december.

However, it has decreased and is below the figure obtained in December 2.022 of 6.5%, which is a result from which the decline began since in the following january it registered 6.4%, in february 6%, march 5%, april 4.9%, may 4.1% and in november 3.1%. In this month of november mentioned, the record has been the minimum level since then, as shown before, it rose, and the last one is at 3.5% in march.

The goal of the monetary policy of the FED, that is, the Federal Reserve of the United States, concerns a level of inflation that they call underlying, which is not the normal and current record of inflation described above, but another where the calculation is obtained of measuring inflation without food and energy. This calculation allows them to follow up to obtain a set goal that is 2%, but that until march of this year was still distant with a result of 3.8%. In other words, although current inflation has decreased, the FED still has work to do with underlying inflation.

For its part, inflation in Colombia for march was 7.36%, lower than that of february of 7.74% and that of December 2.023 of 9.28%. Also, lower than December 2.022 of 13.12%. Inflation has been falling for more than a year. But the monetary policy goal of the Central Bank of Colombia (Banco de la República) is 3%, so as of march it is still more than 4 percentage points away.

With the above, some observations are the following. The United States has a more ambitious inflation goal than the Colombian one, which explains why the FED has not yet begun to lower its interest rate and keeps it the same at 5.25% - 5.5% while waiting for better results, while that in Colombia the Bank of the Republic has already started the decline and has lowered its rate from 13.25% to 12.25%.

It is possible that inflation in the United States reached a minimum of 3.1% in November 2.023, then rose and from march onwards remained close to the 3.5% recorded in that month. In Colombia, food prices during these first months of the year remain downward and inflation is expected to continue with that trend with an absorbed effect of the El Niño phenomenon.

The US FED, with low unemployment of 3.8% as of march and a relatively high GDP of 2.5% for 2.023, can keep its interest rate unchanged for a while longer while waiting for changes in the underlying inflation rate that bring it closer to the goal before beginning the expected decline in its rate. But in Colombia, the Bank of the Republic, with low GDP growth of 0.6% in 2.023 and high unemployment of 11.7% as of february, has received frequent suggestions to accelerate the reduction of the rate, which has not affected the caution it maintains the Bank in the movements of the rate also according to its constitutional independence.

Another aspect to consider is the case that in the United States inflation reached a minimum of 3.1% last november and has subsequently risen a few points, nothing worrying, but it does show the resistance there is to continue falling after a certain level. If with the results of that november, the FED had proceeded to begin the decrease in its rate, the subsequent results, which are the rise of those of december and up to and including march, would have shown that its decrease was hasty, and it would be losing by its credibility.

For Colombia, it is not expected that there will be major effects on food prices with the “El Niño” climate, but rather that they will be adequately absorbed, and inflation will continue to decline. But just as in the United States, it could also happen that inflation rises a few points in a month or two before continuing its decline. Decrease because Colombia is still far from reaching the minimum that is Colombia's history in recent years, before the pandemic, of records between 3% and 5%. But those months of temporary increase, if it were the case and that followed downward movements in the interest rate by the Bank, would be showing that its action was hasty and would reduce its credibility.

Therefore, a cautious action like the one that the Bank of the Republic has taken until now is advisable, as well as short or measured downward, but safe, movements in the interest rate. As for the FED, with the space provided by its country's positive results in unemployment and GDP, it should persist for a while longer and, given the rise of points in current inflation in recent months, in seeking to reach underlying inflation of its goal, before beginning the first decrease in the interest rate.