First, it is important to understand how the Federal Reserve works, since, although it is the United States Central Bank, it does not function in the same way as the Central Bank of the Argentine Republic.
The Federal Reserve System, better known as the Fed, is a conglomerate of US private banks run by the Board of Governors, its public legacy.
However, this council decides unilaterally, that is, does not need the approval of the President or Congress, although it is overseen by the legislature that reviews the activity reports (twice a year) and the short-term plans. For this, the current Short circuit between Trump and the presidency of the Federal Reserve.
As the Central Bank is responsible for issuing money, and so it follows a fiduciary pattern. This means that printing dollars is not supported by gold, but that the issue is set by the Fed's monetary authority., Establishing Interest Rates. In this sense, it helps to think interest as the cost of money, so that, when establishing the interest rate, the dollar issue price is fixed.
The problem with this is that every dollar issued carries with it a debt, which would be the interest rate, and in that sense is that the sustainability of the system is in doubt. But International markets now work that way, and all countries have reserves in the US currency.
In short, the Fed controls the rate of interest and the supply of money to the economy, regulating the value of the currency issued. The more interest, the less money circulates and the dollar stronger. In turn, they hold the country's reserves in the case of private US, federal and state banks.
Strengthening dollar policy
Jerome Powell is the sixteenth president of the Federal Reserve, although he has been a member of the Board of Governors since elected by Donald Trump in February of this year to fill the post of chairman of the Federal Reserve System.
In conjunction with "Make America Great Again" is that the strengthening of the currency deserves a central scene, especially if we take into account that the interest rate was never recovered from the 2008 crisis.
In this sense, there have been three increases in interest rates so far this year under its administration and it is expected that the fourth meeting will be announced at the last meeting of the year. The last increase was from 2 to 2.25%.
Implications for all
Each time the Fed decides to raise the interest rate, that is, strengthening the dollar, what happens at the global level is that capital is more motivated to switch to the US currency or its bonds.
Because of this, it is With each increase, emerging economies see their "investment rain" shrink since it activates the exit of the investors of the emergent (more risky) markets that are passed to North American titles.
In turn, complicates the financial situation of those who are indebted to foreign currency because it increases existing debts. President Donald Trump himself keeps pressure on the Central Bank of the United States not to raise interest rates, or at least this is expressed in his Twitter account, where he asks to "feel the market."
I hope Fed folks will read today's Wall Street Journal editorial before making another mistake. Also, do not let the market become more illiquid than it already is. Stop the 50 B's. Feel the market, do not just go by meaningless numbers. Good luck!
– Donald J. Trump (@realDonaldTrump)
December 18, 2018
Not only are emerging economies in crisis, but Wall Street is also showing an excess of volatilitylike the rest of the world's stock exchanges and the financial system as a whole.
Implications for Argentina
The strengthening of the dollar and the increase in the interest rate hit us directly in this historical moment of great external indebtedness. The increase in the interest rate not only makes investments in our country less attractive, but also makes the commitments more expensive.
No less situation for Argentina, which It owns more than 70% of public debt in foreign currency and is the emerging country that has most issued public debt in foreign currency since December 2015 until today.
In this key, we should read the Country Risk, which is calculated based on the yield of US Treasury bills, your Fed increase increase is automatic.
In turn, The strengthening of the dollar also has direct effects on our foreign exchange market. In this sense, the exchange races suffered this year have largely departed from a more adverse international context.
On Wednesday we will know that it has been decided and we will see the effects in Argentina and in the world.