Reflections of The International Scenario on Brazil
When an economist with the stature of Larry Summers warns of the probability, albeit low (15%), that the Fed’s next interest rate movement might be further elevation instead of a reduction, as desired by the market, it is wise to pay attention to the reasons underpinning that comment. The main one involves the implications of the expansionary fiscal policy in the United States on the macroeconomic equilibrium, with two principle reflections: growth of aggregate demand caused by the Keynesian multiplier effect, and the corresponding higher neutral interest rate, making all the heuristics used by the market regarding the projections of the next movements of the Fed obsolete.
Based on the similarity of the fiscal-monetary mix in the United States and Brazil, it will be enlightening to discuss the American economy and its reflections on the Brazilian economy, including inferences about the next monetary policy steps here. Besides the necessary deceleration of the American economy, Japan is now in recession and deceleration is under way in Europe and China. However, the global challenges go beyond the macroeconomic sphere. There are also many geopolitical risks in Ukraine and the Middle East, including the Houthi attacks in the Red Sea, particularly hampering navigation between Europe and China. Curiously, despite these challenging forces, risk aversion in the world remains low, likely caused by the extremely high liquidity, especially in the United States.
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