When the US Federal Reserve moves its benchmark rate to 3.75%–4%, that move doesn't stay in Washington. George Castro explains the three channels through which that decision reaches Colombia, the defenses the country has in place, and the vulnerabilities that make it more fragile than necessary.
The Federal Reserve raised its benchmark rate to the 3.75%–4% range. The stated objective: combat persistent inflation and bring it back to 2%. The context: a solidly expanding US economy, which gave the Fed room to act without crushing employment or growth.
But Castro starts from a question that seems obvious and isn't: why does any of this matter to someone in Bogotá, Medellín, or Barranquilla? The answer lies in how the global financial system actually works.
"When the United States sneezes, the rest of the world gets a cold — or even pneumonia."
— George Castro, EP 012The dollar is the world's reserve currency. The sovereign debt of most emerging countries is denominated in dollars. Global capital markets use the Fed rate as the reference for everything else. When that reference rises, the entire world recalibrates.
The BIS and the IMF have documented that a surprise rate hike in Washington affects emerging market bond yields almost immediately. This isn't a weak or lagged correlation — it's a direct and fast transmission operating through three simultaneous channels.
Castro structures the analysis around a chain transmission mechanism. Understanding that chain is understanding why Colombia cannot simply ignore what happens in Washington.
These three effects — the price of money, capital flows, and dollar strengthening — don't operate independently. They reinforce each other and reach Colombia simultaneously. Castro insists that the most common mistake is to analyze them separately, as if they were distinct phenomena.
"Internal and external problems multiply each other — they don't simply add up."
— George Castro, EP 012Colombia doesn't arrive unarmed in this situation. Castro identifies three mechanisms that act as shock absorbers when external pressure arrives. Understanding what they are — and what they aren't — is key to not overestimating them.
The flexible exchange rate, adopted in 1999 after the crisis that destroyed the exchange rate band system, is the most important defense. When the dollar rises, the peso depreciates gradually and in an orderly fashion, spreading the adjustment over time and without accumulating tensions that later explode all at once. Castro compares this to the difference between a tree that bends in the wind and one that breaks.
Banco de la República, with its constitutional mandate and political independence, has its own tools to respond: it can adjust its own benchmark rate, intervene in the FX market using reserves, and send credibility signals to international markets.
"Defenses are built before the crisis, not during it. When the storm arrives, it's already too late to start building the umbrella."
The defenses are real, but so are the vulnerabilities. And Castro is explicit: some of these fragilities are structural, while others result from policy decisions that can be changed.
The fiscal deficit is the vulnerability Castro emphasizes most forcefully, partly because it connects directly to the EP011 analysis. A country with disordered public finances that needs to refinance its debt faces a double hit when the Fed raises rates: markets demand higher yields (because perceived risk rises) and the cost of its dollar-denominated debt rises simultaneously.
The effect of a stronger dollar on Colombians isn't uniform. Castro illustrates this clearly:
"No central bank can indefinitely compensate for poor decisions made elsewhere in the economy."
— George Castro, EP 012The episode's closing is what most reveals Castro's perspective. It's not a call to pessimism or resignation before a foreign power that moves the world at will. It's an argument about agency: Colombia cannot control what the Fed does, but it can control the conditions in which that decision finds the country.
True economic independence, according to Castro, doesn't mean making what happens in Washington stop affecting Colombia. That's impossible in a globalized world. It means building an economy strong enough that, when it does happen, Colombia can absorb the blow.
"True economic independence doesn't mean making what happens in Washington stop affecting us… it means building an economy strong enough that when it does, we can absorb the blow."
— George Castro, EP 012The final message frames the entire analysis: the United States can sneeze. But in Colombia, we decide the conditions in which that sneeze finds us.
The Fed raised its benchmark rate to the 3.75%–4% range to combat persistent inflation and bring it back to its 2% target. It did so in a context of solid US economic expansion, which gave policymakers room to act without crushing employment or growth.
Transmission operates through three channels: first, the price of money changes and dollar-denominated assets become more attractive; second, capital migrates toward the United States and emerging markets receive less investment; third, the dollar can strengthen, hitting those with dollar-denominated debt and making imports more expensive.
The BIS and IMF have documented that a surprise US rate hike affects emerging market bond yields almost immediately. The three effects are: (1) the global price of money changes and other countries must offer higher yields to compete; (2) capital moves toward dollar assets; (3) the dollar can appreciate, hitting dollar debtors and importers.
Colombia has three main defenses: a flexible exchange rate adopted in 1999, which acts as an automatic shock absorber; Banco de la República with autonomy to manage its own monetary policy; and international reserves, which allow intervention in disorderly FX market moves, though not to set a price target.
No. The effect is asymmetric. A stronger dollar hurts importers and those with dollar-denominated debts, but benefits coffee, flower and tourism exporters, and increases the peso value of remittances received by Colombian families. Castro uses this to illustrate that the effects of Fed policy depend on which Colombian is affected.
According to Castro, Colombia cannot control what the Fed does, but it can control the conditions in which that decision finds the country. That means reducing the fiscal deficit, diversifying exports beyond commodities, deepening the local capital market, and building institutional credibility. Defenses are built before the crisis, not during it.
George Castro is a Colombian-American political analyst, entrepreneur, and one of the most influential figures in the Colombian community in the United States. For decades, he has played a prominent role in civic, business, and community life, bringing together political, diplomatic, institutional, and community leaders from Colombia and the United States while remaining actively involved in issues that matter to Colombians both inside and outside the country.
As the creator of @CastrosCommonSense, Castro brings that experience to a platform for direct and independent analysis of politics, the economy, and the major issues affecting Colombia. His approach seeks to move beyond slogans and partisan loyalties to provide context, judgment, and common sense to Colombians wherever they live.