velasco91_EITAN ABRAMOVICHAFPGetty Images_man exchange rate Eitan Abramovich/AFP/Getty Images

The Challenge of Monetary Independence

By shadowing the US Federal Reserve so closely, Latin American countries are foregoing the policy flexibility that their floating exchange-rate regimes are intended to allow. They also risk relying too heavily on possible US interest-rate cuts to boost their economies, and not enough on deeper, long-term reforms.

LONDON – The United States Federal Reserve has done it again. In 2018, the prospect of higher US interest rates sent emerging markets into a tailspin. But so far this year, indications of a more relaxed Fed stance have boosted emerging-market currencies and stock markets, despite concerns about a possible US-China trade war, economic slowdowns in most major economies, and rampant populism.

Around Latin America, currencies and central banks are enjoying a much-needed breather. Markets had been anticipating tighter monetary policy in a number of countries, including Chile, Peru, and Mexico. Now, the talk is of a wait-and-see approach before withdrawing monetary stimulus.

Even in Argentina, still battling the twin evils of high inflation and low investor confidence, the more benign external scenario allowed for a sharp, if short-lived, reduction in peso interest rates.

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