When the shock only raises the price of money: the taper that became Selic, not crisis

Derivative

The extreme

In September 2013, with emerging markets in stress and the real pressured by the Federal Reserve's signal, the natural question was where the shock would charge its price. The archive's answer is unusual: the price was the cost of money, not the breaking of the market. The central bank was running a tightening cycle to defend the currency, and the Selic target was already at 9.0% a year — three points above the 8.0% of June. The real stayed firm in the pressured band of the year, at R$ 2.27.

What happened next

The tightening continued, and that is where the external shock really showed up. The Selic target rose to 10.0% a year in December 2013 and reached 10.75% in March 2014. The higher rate rewarded those holding the real better and made it costlier to carry risk positions — exactly the effect a central bank seeks when defending the currency. While the price of money climbed step by step, domestic appetite ran the other way: it ended March 2014 at the absolute top of the series, at 100.

What didn't happen

Rates rose without the risk regime turning. Anyone associating monetary tightening with automatic aversion would have misread it — in 2013 and early 2014, a rising Selic lived alongside a Perene Risk Index that not only held but, months later, marked the top. There was no market recession, no flight from risk, none of the crisis the external stress seemed to announce.

Honest verdict

The engine showed that the channel through which the taper reached Brazil was monetary policy, not market panic. Sometimes the price of the external shock is only the higher rate, and the risk regime never even takes notice.

Continue the story: The 2013 taper tantrum · The alarm that didn't cross the border · What the Selic and the cost of money are →

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Characters: Rates (Selic) · Dollar