“To splash in the mud!”: the response that an Economy Minister received after the US rate increases.

—I have difficulties with your policies— Juan Sourrouille told Paul Volcker.

—Really?—replied the American.

Sourrouille was Minister of Economy of Argentina. From the government of Raúl Alfonsín. Volcker, head of the Federal Reserve (Central Bank of the United States). The president was Ronald Reagan.

—The rate increase changes the program numbers for me— said the Argentine.

Volcker, an economist whose figure attracted worldwide attention—he was two meters tall and at that time his policy of having raised Reserve rates to almost 20% to lower inflation in the United States in the seventies was famous—listened to Sourrouille with a cigarette in his hand. The Argentine recounted the scene several years later.

Almost a month had passed since Argentina had launched a price, wage and public spending stabilization program that was called Plan Austral. And the Argentine economist’s argument was that the assumptions on which his team, the people from the Treasury and the Reserve had established the main parameters of the model, would begin to modify.

Overacting his drama, the Argentine insisted that while the American had lowered rates from almost 12% a few months earlier during 1986, he was now raising them again at the end of that year. And I was going to do it almost one point between July and December 1987.

To make matters worse, in September 1985, corn—then the main crop—was worth 25% less than a year before. The Argentine accounts indicated that exports would fall by US$ 1,500 million and that the trade balance would register a deficit of US$ 2,859 million. In September the IMF would make a disbursement and if the reserve accumulation goals were not met, there was no money.

After reviewing the folders that he was asking his secretary for, Volcker told Sourrouille.

“Look, Juan, you’re right,” Volcker concluded. “But you know what?” I cannot change the anti-inflationary policy of the United States.

Sourrouille was silent.

—We manage to muddle through.

‘Muddle through’ is an expression in English that economists use to refer to that situation in which there is no clear way out and no one has the slightest idea what to do. ‘Somehow muddle through’, one might say, or ‘slosh through the mud’, said Rudiger Dornbusch and Stanley Fischer.

The truth is that for Volcker the time had come for Argentina—and probably other emerging economies—to “slosh through the mud.”

A rise in US rates makes dollar investments more attractive. The greater demand for the US currency appreciates the currency (its price rises) and the opposite occurs with the rest of the currencies and goods such as commodities. Hence, the terror of emerging economies like Argentina (and others in the region) is the increase in rates by the Federal Reserve.

There is a joke that says that non-Peronist governments suffer these blows more. An example was that of Alfonsín but also that of Macri.

In December 2015, just after taking office, the Fed raised rates for the first time in seven years. And in 2018, incoming Fed Chair Jerome Powell raised them four times. Powell received the worst market welcome for a Fed head in history with the S&P 500 and VIX records. Powell announced this week increases for 2022.

—They can’t stand me in the market anymore, Mauricio— Luis Caputo, Secretary of Finance, told the president about the prospects of borrowing more money in 2018.

Soon the financial conditions changed for Argentina and it turned to the Monetary Fund to stop the run against the peso.

The Wall Street Journal reported this year that “President Donald Trump called Kevin Warsh, the current head of the Federal Reserve, intermittently several times. The US president publicly criticized and attacked Warsh’s predecessor, Jerome Powell, (whom he himself had chosen in 2018) for raising rates. The US president this time proposed Warsh, who was now in the market’s sights to see if he will be independent of Trump’s wishes to lower the interest rate as he reproached Powell. Last month Warsh raised rates for the first time since 2023 (25 basis points).

This week there will be a new Fed meeting. The increase in inflation in September (3.7% annually) suggests a new increase. Days later, the legislative elections in the US will be held (Tuesday, November 3). Will Warsh be encouraged to raise rates? In any case, what remains for Caputo, it seems, will be to slosh around in the mud.