The Fed Cuts Rates and Opens the Door for Banxico

The recent decision by the U.S. Federal Reserve (the Fed), while drastic, provides Banco de México (Banxico) with some room to maneuver and could also benefit the peso in its relationship with the dollar, analysts told Expansión. Despite the market raising expectations for a 50 basis point cut, which would leave the interest rate between 4.75% and 5%, the central bank of the world's largest economy surprised many with its decision.

“Even though Banxico's monetary policy is completely independent of the Fed, this will give them the opportunity to continue lowering interest rates without the pressure to adjust the rate differential,” stated Gabriela Siller, head of economic and financial analysis at Banco Base. Although the dollar has strengthened globally, stabilizing the differential between Banxico's and the Fed's interest rates “could be favorable for the exchange rate” in the near future, suggested Humberto Calzada, chief economist at Rankia Latin America. Despite Banxico's autonomy from the Fed, “Banxico generally reacts by following the Fed's lead. If we expected the central bank to lower the rate by 25 basis points, it's very likely we’ll see a more significant cut,” added Matías Osorio, sales manager and international markets expert at Capitaria. Currently, Banxico's interest rate stands at 10.75%. The Board of Governors has stated that it will not only consider inflation and decisions made by the Federal Reserve when making its monetary policy decisions. It’s likely that once investors absorb the Fed's cut, the peso will appreciate against the dollar, according to Calzada. Analysts agree that the Fed's decision was quite aggressive, even though a rate decrease had been anticipated throughout the year, with expectations of a 25 basis point adjustment. However, in the last week, the odds increased that the cut would be 50 basis points. “This is a bold cut. Usually, we see cuts of 25 basis points,” noted Siller. “It's a measure that could be considered somewhat risky or very bold,” added Calzada.

Regarding the economic impact, “the last times the Fed began its downward cycle with a 50 basis point cut were in January 2001 and September 2007, and after that, we faced recessions. That’s why this cut has generated concern in the market,” emphasized the economic analysis director at Banco Base. The Fed's decision surprised the market, causing gold prices to reach historic highs around $2,600 an ounce and strengthening the dollar globally, as detailed by Matías Osorio. The mandate of the U.S. central bank focuses not only on maintaining inflation at stable levels, with a target of 2%, but also on promoting maximum employment levels. By lowering interest rates, the cost of borrowing decreases, which means that “access to credit becomes more affordable, companies can take on debt, expand, hire more staff, and thereby reduce unemployment,” which translates to growth for the economy, indicated Osorio. However, the impact of the cut will not be immediate; rather, it will manifest over the medium term since the Fed's monetary policy had been at very restrictive levels. “For the state of the labor market, if the Fed had not cut (the rate), we might have seen a mild slowdown instead of the moderate one that is expected,” commented Siller. According to the Fed's report, maintaining the labor market is its top priority at this time. “A reduction of 25 basis points is already projected for November, with a 64% probability,” anticipated Felipe Mendoza, market analyst at ATFX. An increase in liquidity in the U.S. economy “could lead to overvaluation in financial markets and (a rebound) in inflation,” although “markets reacted negatively because such an aggressive cut isn’t good either,” pointed out Calzada. “The Fed has an independent mandate and should not be influenced by politics in its decisions, although there are always speculations about how this affects the Fed’s decisions. We believe they are perceiving something that (others) are not seeing by making this decision,” he concluded.

The Fed's interest rate cut could mark a critical point for emerging economies, including Mexico. As Banxico evaluates its next move, it will be essential to monitor investor behavior and how these decisions affect the exchange rate and local inflation. Proactive and well-founded decisions from the central bank will be key to maintaining economic stability in an uncertain global environment.