Rate hike and tightening path… The FOMC meeting increased the interest rate by 25 basis points for the first time since 2018. According to the inflation situation, 50 basis points was considered as a suitable start in the previous period, but the risks of global economic slowdown created by the Russian crisis caused the Fed to set a more gradual course that would not reduce economic growth.
Inflationary pressure and asset purchases… Inflation pressure in the US is at its highest level in the last four decades. Therefore, the Fed will consider continuing any tightening that the economy may carry at this stage. The asset purchase program, which had been narrowed since November, was terminated as of March. Before the contraction, the Fed was making $120 billion in monthly asset purchases. Of that $120 billion, 80 billion consisted of US Treasury bonds and the remaining $40 billion in mortgage-backed securities.
Comparison of US CPI, 10-year bond yield and Fed effective interest rate.. Source: Bloomberg
Global uncertainties… At this stage, it is impossible for the markets to know how the negotiations between Russia and Ukraine will end. Therefore, it is useful to take into account this phenomenon, which will cause net damage to the global economy. Central banks have to apply the gradual normalization rules in monetary policy, as the imbalance in commodity prices will progress together with industrial slowdown and supply shocks. This is the main reason why the Fed increased interest rates by 25 basis points, not 50. A Fed that started with 50 basis points would be hawkish, now we have a Fed that will move forward at a predictable pace and be careful not to hurt other indicators.
Conclusion? Global sanctions against Russia continue. The risk of recession is uncertain, but we see from the economic projections that the Fed is not expecting a recession, but a slowdown. Due to rising inflation rates, the Fed increased interest rates for the first time since 2018. Higher inflation pressure is expected amid steadily rising prices in the energy and broader commodity markets. A greater uncertainty will be the resilience of economic growth to the headwinds of these higher borrowing costs, a widespread cost of living crisis, geopolitical stress from the occupation of Ukraine, China's latest COVID-19 shutdowns, financial market volatility and the withdrawal of pandemic financial aid.
Kaynak Tera Yatırım-Enver Erkan
Hibya Haber Ajansı
