Anti-inflationary policy of Argentina and the United States: reference rate vs monetary aggregates

There are two main ways to implement a anti-inflationary monetary policy currently. On the one hand, we have the approach applied by the world’s main central banks based on “inflation targeting”which in some way means impacting the entire interest rate curve from its initial point, defined as the reference rate, and with it affect the real economy via multiple coolingsmainly aimed at the consumptionreaching the stated annual inflation objective (the “target”).

The best-known Central Bank on this front is obviously the United States Federal Reserve, which with a periodicity close to four weeks (FOMC) has been informing the market of its respective reference rate level (current 5.25%) and based on said announcements and the verbiage used by the Federal Reserve in each monetary policy decision several markets adjust immediately.

On the one hand, we have the reference rate futures that move away from the spot level of said rate and, on the contrary, begin to anticipate the future pace of evolution of said variable over time and that provides the market with a expected path of the future spot levels of said reference rate, say, in the next three years.

The level for December 2024 that the futures market expects is currently 5% for the North American reference rate. In this way, the Fed infects the reference rate path and provides the market with a key variable.: expected future dynamics of the reference rate three years from now.

What defines this sequence of approximate reference rates from the futures market are the expectations that are being built about two variables clue.

On the one hand, the expected inflation path over time and, on the other hand, the pace of growth or recession that the North American economy could show, also over time.

The level for December 2024 that the futures market expects is currently 5% for the North American reference rate.

Once the sequence of expected reference rates has been defined, the rest of the short part of the interest rate curve (up to approximately three years) adjust immediately using a basic arbitration principle.

If, for example, one were analyzing the yield of a 1-year North American sovereign bond, an investor who decided to lock said rate would do so in a manner consistent with the ssequence of reference rates priced in the futures market.

The logic is very simple: one could be playing one day permanently on the reference rate curve or, on the contrary, one could lock the yield of a 1-year bond and in this double optionality a level of interest rate indifference results. 1 year that would leave breakeven (tied) to the investor between one option and another.

This is precisely what determines the 1 year (1yr) yield given a sequence priced by the reference rate futures market and the resulting arbitrage. The same occurs for the 2-year and 3-year rates and this basically falls into what is normally described as the short part of the interest rate curvewhich remains closely related to the short-term situation.

Once again, the actor that has an exclusive role in affecting them is the Fed itself through the spot level that it decides for its reference rate and what it “says” (wording). Fed wording is extremely importantbeyond the measures that you eventually decide.

Regarding the long part of the curve, if we focus, for example, on the yield of the 30-year bond, obviously the uncertainty that is priced into said bond implies thirty long years of noise hence The monetary situation usually has a much lower impact on long bonds than on short bonds.

In long bonds currently what has been weighing very substantially is a American deficit out of control and a indebtedness which is projected that by 2030 it will already exceed the levels reached as a GDP ratio in World War II (125%).

Clearly, the fiscal policy faced by the president Juan Domingo Biden it is extremely keynesian and is based on the notion of excessive public spending that is financed mainly by the issuance of bondswhich is generating a sequence of increase in debt over GDP which will soon approach World War II levels. It is clear that The long part of the curve is quite independent of inflationary fluctuations that the United States is experiencing in its immediate situation.

And from the other side of the equation comes Argentinaa country that just a few months ago was running with a monthly inflation of 25%on the verge of a hyper, and now said figure is already approaching the eleven% even with medium-term expectations pointing to a very strong inflationary deceleration that could lead us clearly to the minimum one-digit levels towards the end of the year, which would be a wonderful result and highly probable.

A government must always be evaluated with the restrictions with which it begins and with the inheritance it receives. In this sense, the initial conditions with which it was assumed were around apocalyptic and, in that context, the advances are very relevant that it has been achieving in terms of inflation and despite all the distortions that this same process has been generating, especially in a system of relative prices that currently exhibits esoteric values and you need at least five years to begin converging towards some semblance of normalitywhich also makes sense given the inheritance received.

In this situation, and given the enormous limitations that the Argentine capital market exhibits, the mechanisms of transferability of interest rates to the real economy are very limited, which suggests that in these contexts perhaps it makes more sense to use a different anti-inflationary approach to that implemented in the United States and therefore based on a control of monetary aggregates.

This is precisely what has been observed since the assumption of the libertarian government in the sense that progress is being made by executing a very strong reduction in the real money supply in pesos and this concept is one of the main ingredients for the disinflation that has been observed in recent months.

The irony of all this is that it is used for inflation, which is “the problem to solve”as the main ally of a liquefaction of public spending and real money supply that under current conditions allows for “disinflation.”

That is, the “very high inherited spot inflation” By this government, through a very strong reduction in the real money supply, I was causing “future disinflation”, which in itself is one of those many ironies presented by an economy unique in the world like Argentina.

The truth is that, despite a multiplicity of distortions, This approach has been working and That will probably allow the libertarian government to generate the first big news among Argentines for the end of 2024: “notable disinflation”.

Until this happens It is impossible to expect an economic recovery, an aspect that will surely be addressed at the beginning of 2025 to achieve an expansionary dynamic in the real economy and reach the legislative elections with “two” good news: disinflation and reactivation. It’s possible.

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