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The Latin American markets have been unsettled lately as the U.S. Federal Reserve (Fed) has failed to provide a clear signal on the specific date of its interest rate rises.
For most of this year, expectations have risen that the Fed will raise interest rates. However, the Fed has so far remained quiet, unnerving markets worldwide.
Initially, many analysts, including those in Latin America, believed that Sept. 16 might be the magic date, given that the Fed is holding a policy meeting on that date. This idea was comprehensively panned by the Wall Street Journal this week as it reported on Sept. 9 that "Federal Reserve officials aren't near an agreement to begin raising short-term interest rates."
At a Brookings Institute event on Sept. 3, four former Fed economists agreed that the Fed is unlikely to raise short-term interest rate at its September meeting, and all of them expected a rate hike before year-end.
However, these delays have begun to jar, with one CNBC analyst even saying on Sept. 12 that a hike may have to wait until January 2017.
In Latin America, this has led to a curious situation. With the region's heavyweight currencies like the Mexican peso and Brazilian real tumbling against the U.S. dollar, an interest rate hike might not have been to their advantage.
But now, with weeks of anticipation, the continent's central bankers have circled the wagons and adjusted their monetary policies as best they can.
On Aug. 31, Agustin Carstens, governor of the Bank of Mexico, said that a rate hike sends an encouraging sign of economic health, even if it does force growth-challenged Mexico to also raise rates within days, according to Mexican daily El Universal.
"If the Fed tightens, it will be due to the fact that they have a perception that inflation is drifting up, but more importantly, that unemployment is falling and the economy is recovering," he said.
Chile also knows that the rate hike could see the Chilean peso lose further ground against the U.S. dollar. While closer ties with China may help to mitigate capital flow in the long-run, a specific date for the rate hike could help firmly guide policy.
Chile has been one of the prime beneficiaries of the Fed's low rate, with inflation rising steadily in recent years. Speaking at a central banking conference in Jackson Hole in late August, Rodrigo Vergara, Chile's central bank governor, admitted that Latin America had seen a surge of inflation due to Fed policy.
However, while certainty of a coming rate hike would help stabilize markets, opinions seem to be divided on where that certainty would lead to.
Arguably, a rate hike would actually hit Brazil the hardest. While it is unclear how much of Brazil's foreign debt is in American currency, Brazil's deficit is skyrocketing.
Beyond Brazil, there may be hope, and it seems investors have not lost faith in Latin America.
According to the Wall Street Journal, assets such as Chile's political stability and fiscal discipline or the range of Mexican exports to the U.S. are safeguarding these economies. "Investors don't seem to be broadly fleeing LATAM," said Eduardo Suarez, co-head of Latin America strategy at Scotiabank, in an August note.
