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Will the Fed Strangle Latin America Again?

In the 1980s, the Federal Reserve’s dramatic interest-rate hikes led to a lost decade of economic growth in highly indebted Latin American countries. Today, however, the US itself is highly leveraged, which will make the Fed hesitant to pursue measures that imply severe collateral damage elsewhere.

MADRID – Thirty-five years after former US Federal Reserve Chair Paul Volcker left office (and nearly three years after his death), the mere mention of his name still gives shivers to Latin Americans who remember the economic devastation caused by his battle against runaway inflation in the 1980s. With US inflation near a 40-year high, at 8.3% in August, Fed Chair Jerome Powell recently signaled policymakers’ commitment to hiking interest rates further, prompting many to wonder if Latin America is adequately protected against the collateral economic damage of another “Volcker Moment.”

The short answer is yes – because there won’t be one.

In April 1980, consumer prices in the United States increased at an annual rate of 14.6%, and the Fed under Volcker responded aggressively. The benchmark federal funds rate rose from 9.9% in July 1980 to 22% by the end of that year, leading to a sharp and protracted recession in 1981 and 1982. The US unemployment rate soared, and it took three years to return to its level before Volcker began his anti-inflation crusade. The US dollar appreciated 50% against the Deutsche Mark – then Europe’s predominant currency – and commodity prices plummeted.

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