The US Federal Reserve (Fed) has cut interest rates for the second time in a row, paving the way for the Bank of Mexico (Banxico) to follow suit.
During its October 29 meeting, the Fed reduced the rate by 25 basis points, bringing it to a range of 3.75-4%. However, officials were divided on future steps. Many advocated for a pause, while 'several' indicated the possibility of another cut in December. The decision will depend on incoming data, the economic outlook, and the balance of risks.
The meeting's document paints a mixed picture. It shows clear concern over employment levels and the risk that inflation may not converge to the 2% target. At the same time, inflation has risen again compared to the start of the year and remains somewhat elevated. Economic activity is growing at a moderate pace, and the labor market is cooling, with slower job creation and a slightly higher unemployment rate, though still low.
Fed members who supported the cut argued that risks to the labor market have intensified and that inflationary pressures no longer show such a clear upward trend. They stated that 'it is appropriate to move gradually to a less restrictive stance to avoid a further deterioration in labor market conditions.'
Those who opposed further cuts noted that progress toward the 2% target has stalled, inflation has had some flare-ups, and there are still no firm signs of convergence. The October decision was made during a US government shutdown, which left incomplete data and forced cautious action.
A smaller interest rate differential between the two countries could also reduce the peso's appeal against the dollar and compel Banxico to be more cautious in its decision-making. Furthermore, heightened concern about employment in the US economy signals a less favorable external environment for Mexican exports, particularly industrial ones, which already show weakness despite the boost from the Plan Mexico.
Conversely, a more flexible Fed could give the Mexican central bank more room to ease the cost of credit and support economic activity.
