With budget reform legislation encountering various setbacks, market confidence waned further and capital outflows from Brazil continued, drawing down foreign currency reserves. Ultimately, the decision was taken to allow the real to float, and it subsequently depreciated sharply. Brazilian authorities must walk a very narrow, difficult path of restoring confidence and keeping inflation contained with monetary policy while dealing with serious fiscal imbalances.
Yet, I anticipate, as the FOMC indicated in its most recent statement, that inflation will move back toward our target over time. Economic growth is firming, and some of the factors that have held inflation down, such as the one-time cut in payments to Medicare providers, are likely to abate over time.