O Banco Central started cutting the feesbut you may have to raise the rate again at any time because you are worried about the effects of public spending about the inflation. The President of the Republic, of course, is not happy with this. And he begins to put pressure on the Central Bank – which even includes threats of dismissal.
Anyone who reads this script without warning may think that it refers to Brazil. But, in fact, the Central Bank in question is not the Brazilian one: it is the Federal Reserve (Fed), led by Jerome Powell. Yes, the Fed, a reference when it comes to independent central banking, has already started to protect itself from attempts by the elected president Donald Trump to exert more influence over monetary policy in the world’s largest economy.
READ MORE: Fasten your seatbelts: under Trump, the market sees 10-year interest rates in the US back to 5%
It wouldn’t be the first time. In 2018, during the Republican’s first term, Trump publicly criticized Powell on several occasions – both for raising and cutting interest rates. And made threats to remove him from the position for which he was chosen… by whom? By Trump himself.
But now the battle could be even tougher. After all, Trump’s plans to generate growth in the American economy are much bolder than in the previous term. And this should result in more inflation and also in worsening of the fiscal situation: analysts expect an increase in the public deficit of the order of US$7.5 trillion over a decade.
Some of Trump’s supporters have already attacked the Fed. One of the “enemies” of the American Central Bank is Senator Mike Lee, Republican from Utah, who presented a bill in June to abolish the Central Bank, accusing it of being a “economic manipulator that directly contributed to the financial instability many Americans face today.” Lee said on X (formerly Twitter) that he wants to see the Fed under the president’s control. The parliamentarian’s position had the support of the businessman Elon Muskwho promises to have an important role in the new government.
READ MORE: More inflation, less taxes: what Trump’s victory means for the US economy
Trump does not have the legal power to fire Powell. And the president of the Fed, in a press conference last week, disconcerted after a question, said he would not resign even if the President of the Republic asked him to. This “climate” makes investors uncomfortable. They fear that a crusade of attacks against the Fed will end up destabilizing investor confidence in the markets, both in stocks and government bonds.
I am you tomorrow
Brazil already knows this story. The attacks of Lula against the president of the Central Bank Roberto Campos Neto generated a lot of uncertainty about the BC’s ability to act to contain inflation. So much so that, with each statement by the president, the dollar and interest rates rose.
The situation worsened even further in May, when the four directors of the Monetary Policy Committee (Copom) appointed by the new government voted for a 0.5 percentage point cut in the Selicagainst the majority, which defended a reduction of 0.25 points. This event changed the dynamics of the markets: the dollar consolidated above R$5.50 and the real interest on NTN-Bs exceeded 6% per year. And they never went back.
What experts say is that only with the independence of the Central Bank fully assured will monetary policy be effective in the fight to reduce inflation and pave the way for economic growth. But neither Trump nor Lula seem to give credit to this maxim. Even with completely opposite ideological orientationsboth tried to influence the decisions of their central banks, thinking that lower interest rates could support their government plans.
What can explain this common point between the two rulers is “more populist characteristics”, says the former director of the Central Bank, José Julio Sennaresearcher at the Head of the Center for Monetary Studies at the Brazilian Institute of Economics at Fundação Getulio Vargas (FGV/Ibre) and associate consultant at MCM Consultores.
Trump has said he wants to end inflation and keep interest rates low. But it also wants to raise tariffs, contain immigration and cut taxes, the perfect recipe for generating a lot of inflation. “I foresee an uncomfortable tug of war, with aggressive comments and pressure of all kinds,” says Senna.
READ MORE: The alert came on: for the first time in 20 years, debt linked to Selic approaches 50% of the total
Still, the expert does not believe that the pressure coming from the White House will, in fact, be able to undermine the Fed’s independence. This would only happen with the consent of Congress. “I don’t believe that American institutions agree with this idea, it won’t progress,” he says. “But there will be unnecessary noise.”
Here, in common with what is seen in American lands, the public spending It is an important element in boosting economic growth. At the same time, it has helped to put pressure on inflation. But the worst side effect is the prospect of a lack of control over public debt in Brazil: experts believe that the net debt x GDP ratio could exceed 90% in two or three years, which is a red flag for the country’s fiscal policy.
Reducing interest rates, therefore, would make life easier for the government in the short term. But the central point of Lula’s clashes with Roberto Campos may have another nature: the BC president was appointed by Lula’s predecessor, Jair Bolsonaro. It was a kind of reality check for the PT member, who is in his third term, to have to deal with the rules of an independent BC for the first time – the autonomy of the monetary authority only came into existence in 2021.
Another important difference in relation to the American scenario is that, here, the autonomy of the BC, even though it is defined by law, is still in a process of consolidation. And this increases insecurity in moments of attacks on the BC.
Fabio Akirapartner and chief economist at BlueLine Asset Management, states that a point of attention at this time is that Gabriel Galipolo, the future president of the BC, should have an active participation in the government. Galipolo participated in a meeting called by Lula with the economic team to discuss the fiscal measures that should be adopted. “You won’t see Powell discussing tax cuts with the new US Treasury Secretary”, he compares.
Another difference is that, here, it is the National Monetary Council (CMN) that determines what inflation target the BC should pursue. And the CMN is made up of the Ministers of Finance and Planning, and the president of the BC. In the United States, the discussion is led only by the Fed.
Tax x interest
In the United States, analysts are already beginning to predict an increase in interest rates on 10-year bonds, the so-called T-notes, as a reaction to the fiscal risks that Trump represents. There is talk of a rate close to 5% per year, which, historically, has the potential to generate instability in markets globally.
In Brazil, the market has been expressing great concern about the evolution of spending and fears that the package that should be announced by the government will be insufficient to put the accounts in order. According to the CEO of BR Partners, Ricardo Lacerdathe current dynamics of increased spending calls into question the effectiveness of the interest rate increase that is underway. “After a certain level of interest, the effect becomes very small. Raising the rate further will punish consumers and companies, and will not control inflation. Now, we need to cut costs”, he argues.
