DONALD TRUMP, FED AND INTEREST RATE



Monetary policy is the responsibility of the monetary authority, which is exercised by institutions with different names, such as the Central Reserve Bank or Peru (BCR); Bank of England (BoE); Federal Reserve System (FED) in the United States; Bank of the Republic of Colombia, and so we find monetary regulators in all countries of the world. These institutions apply different instruments for monetary regulation, one of which, often used, is the reference interest rate. The FED It is the form as it is known to the Federal Reserve System, the central bank of the United States, which until February this year was led by Mrs. Janet Yellen, with a conservative and non-expansive policy. Later, President Trump will appoint Jerome Powell, in replacement of the previous president, in the expectation that there will be a different monetary policy than the previous one. The new president has, however, pursued a non-expansionary policy, which is reflected in the increase in the reference interest rate. The Monetary Policy Committee of the FED analyzes the main measures to be applied every 90 days; For example, he decided on 26 September to raise the reference rate by 25 basis points to 2.25%, the third increase in the year and analysts expect a new variation in the month of December. Low interest rates are considered to be expansive because they promote economic growth and avoid the risk of inflation and of course an increase has the opposite effect. The decision to increase the tariff goes against the wish of President Trump, who wants an expansive policy as a means to increase the liquidity of the economy. It should be noted that the decisions of the EDF are technical and separate from political power, as it should be. What is happening in Peru? The monetary policy of the BCR is expansive, which manifests itself in low interest rates, currently 2.75%, for six months. Historically, the rate set by the EDF is much higher than that of the BCR, with a difference of four percentage points (4.25% versus 0.25%); currently, however, the difference is only 0.5%, because it has reduced the BCR and increased the EDF. This situation may have some influence on the Peruvian economy: • Increasing market interest rates because banks finance foreign funds, for which they have to pay a higher rate. • The spread between the United States and Peru is reduced, which may discourage financial investments in our country (and not the real one), with the resulting outflow of short-term capital. • The demand for foreign currency, as a result of the outflow of capital, may put pressure on the demand for foreign currencies, causing the exchange rate to rise. Conclusion The EDF applies a conservative monetary policy, which is emphasized by the increase in the reference interest rate; the BCR lowers the above rate, making the difference between the United States and Peru only 0.5% per year, which may have some impact on the Peruvian economy, such as an increase in active interest rates and, ultimately, an increase of the price of the dollar.


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