No matter how Fed Chairman Powell will refer to the 75 bps interest rate increase, the expected explanation that shows the real reflection of the market is as follows;
· 75 bps is not something the FOMC is actively considering.
If we look at other prominent points from Powell's statement;
· Inflation is too high. The FOMC is moving fast to push inflation down. The FOMC has the tools to reduce inflation.
· The labor market is extremely tight. Labor demand is very strong. FOMC sees more people returning to the workforce. Possible unemployment rates will decrease further. There is a way that demand for workers will be average.
· The momentum in the economy remains strong.
· Inflation remains well above the long-term 2% target.
· The effects of the Russia-Ukraine war are very uncertain.
· FOMC sees 50 bps on the table for the next couple meeting.
· Wages are high, especially in the service sector.
For the US, a recession is a tolerable phenomenon. Therefore, proactiveness in reining in inflation, which is likely to be permanent and structural at the same time when it remains high, is perfectly normal. On the other hand, the fact that the slowdown in growth or the temporary contraction in the phenomenon reflected in the ISMs shows that the Fed will continue to be willing to increase interest rates. The main route of the Fed is to continue with a normalized policy rather than large interventions in the economy in an expansionary direction. However, because this route is diluted with too many variables, there is a very important possibility of catching the harmful effects of QT while avoiding the harmful effects of QE.
Considering the Fed's struggle with borrowing dynamics, the slowing down position of the global economy, and external factors that pose a dual-channel risk to the economy, the guidance it has given so that real interest rates do not rise excessively seems appropriate. Overloaded expectations can be somewhat balanced. It will be emphasized that the tightening is sustainable and at a pace that the economy can sustain. The literal meaning of recession is a two-quarter contraction, however, the extreme high inflation is a phenomenon that may not be limited to two quarters, and it can also bring a demand shock and growth pressure due to the damage it causes to households. Is it preferable whether the recession is cyclical or due to policy failure? Of course, it is not possible to escape a slowdown stemming from the Russian war and the supply chain, by means of policy. In the coming period, the source of this after-inflation will be important.
It seems that the Fed will progress in terms of balance sheet by providing a manageable shrinkage through the debt instruments it has redeemed. On the other hand, the US Treasury shortened its three-month long-term debt sale for the third time in a row. The Treasury is shrinking tender sizes from the record levels needed to finance an increase in government spending on pandemic containment measures. The economic recovery also contributed to a jump in federal tax revenues. The improvement in the Treasury's financing position is considered sufficient to offset the increased needs likely to arise with the Fed's withdrawal of Treasuries from its balance sheet. Despite not clearly impacting the Fed's QT on the Treasury calendar, the outlook for how the runoff will affect future financing needs will be considered overall. The improving economy and increased tax revenues seem to have reduced the Treasury's borrowing needs as well, meaning there will be fewer issuances or smaller auctions. Bond sales due to inflation will continue to increase, which is understandable in an inflationary environment.
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