OPINION
Market Rating Before FOMC MeetingJan 31
FED Increases Interest Rates by 75 Bps for the 4th Consecutive Time
The critical decision of the Federal Open Market Committee (FOMC) dated November 1 – 2 was announced yesterday. In line with the expectations of the markets, the Committee increased the federal fund target to the range of 3.75 – 4.00%, with an interest rate hike of 75 basis points for the fourth time in a row. Thus, the Committee raised interest rates to the highest level in 15 years.
Looking at the details of the FOMC's resolution, it was emphasized that inflation remained high as a result of supply and demand imbalances related to the pandemic and the spread of higher food and energy prices, while the Ukraine war also weighed on global economic activity by creating additional pressure on them.
In the text, where it is stated that the Committee is very careful about inflation rates, it was noted that it was aimed to provide 2% employment and inflation in the long term, and in this context, it was decided that it would be appropriate to reduce the interest rates to the range of 3.75 - 4.00%, while it was also stated that continued increases in the target range would be appropriate in order to achieve a restrictive monetary policy stance that would return inflation to 2% over time.
The Committee underlined that while determining the rate of future increases in the target range, they will take into account the cumulative tightening of the monetary policy, the effects of the policy on inflation, and economic and financial developments. In addition, the Board of Directors reported that the balance sheet tightening cycle, which includes treasury papers and mortgage-backed securities, will continue as planned.
It was underlined that members would be ready to adjust the stance of the monetary policy appropriately in case of risks that may prevent the achievement of the targets. It was also stated that there may be a need to continue tightening until interest rates are sufficiently restrictive.
Underlining that the latest indicators point to a modest growth in expenditure and production, the report reminded that job gains have solidified and unemployment rates have fallen in recent months, while it was written that a wide variety of information, including readings on labor market conditions, inflation pressures, inflation expectations, and financial and international developments, was taken into consideration.
Following the FOMC's interest rate announcement, the statements of FED Chairman Jerome Powell, who appeared before the press, were followed closely. Stressing that they are very committed to lowering inflation, President Powell said that there is still a way to go in interest rates, but it would be appropriate to slow down after a point.
Stating that they took strong measures to reduce demand, the Chairman stated that slowing down the rate hikes was discussed at the meeting, but short-term inflation expectations have increased and a restrictive monetary policy stance will probably be needed for a while longer.
He underlined that long-term inflation expectations are well fixed, but they will act according to the meeting and the incoming macroeconomic data while making their interest rate decisions. Expressing that the slowdown in the rate of increase in interest rates may be in the December or February meeting, but a clear decision has not been made yet, the Chairman of the FED noted that they do not want inflation to ossify.
Stating that he believes the labor market can soften without mass layoffs, Powell emphasized that the labor market remains tight and that price stability is needed for the growth in the labor market to continue.
To sum it up, the message is clearly given that the Committee members do not find the inflation rate, which has fallen from its 41-year peak, to be satisfying yet and that they are quite committed to the 2 percent inflation targets. It should also be noted here that the communication tone of FED Chairman Jerome Powell was hawkish.
President Powell, who signaled that there will be no interruption unless they see a permanent decrease in inflation, stated that they can slow down the rate of increase at some point, but that they need to see the way ahead for this, showing that the bank may consider another 75 basis point increase in interest rates at the December meeting.
However, if the incoming macroeconomic data reveals an optimistic picture, it is understood that the FED Officials may consider a 50 basis point rate hike at the monetary policy meeting in December or February.
Markets were waiting for the Committee's signal to slow down in monetary tightening after the last 75 basis point rate hike. However, the Committee's statement that it is too early to interrupt the monetary tightening cycle may cause the dollar to continue its pressure on highly risk-sensitive assets for a while longer.
Looking at the details of the FOMC's resolution, it was emphasized that inflation remained high as a result of supply and demand imbalances related to the pandemic and the spread of higher food and energy prices, while the Ukraine war also weighed on global economic activity by creating additional pressure on them.
In the text, where it is stated that the Committee is very careful about inflation rates, it was noted that it was aimed to provide 2% employment and inflation in the long term, and in this context, it was decided that it would be appropriate to reduce the interest rates to the range of 3.75 - 4.00%, while it was also stated that continued increases in the target range would be appropriate in order to achieve a restrictive monetary policy stance that would return inflation to 2% over time.
The Committee underlined that while determining the rate of future increases in the target range, they will take into account the cumulative tightening of the monetary policy, the effects of the policy on inflation, and economic and financial developments. In addition, the Board of Directors reported that the balance sheet tightening cycle, which includes treasury papers and mortgage-backed securities, will continue as planned.
It was underlined that members would be ready to adjust the stance of the monetary policy appropriately in case of risks that may prevent the achievement of the targets. It was also stated that there may be a need to continue tightening until interest rates are sufficiently restrictive.
Underlining that the latest indicators point to a modest growth in expenditure and production, the report reminded that job gains have solidified and unemployment rates have fallen in recent months, while it was written that a wide variety of information, including readings on labor market conditions, inflation pressures, inflation expectations, and financial and international developments, was taken into consideration.
Following the FOMC's interest rate announcement, the statements of FED Chairman Jerome Powell, who appeared before the press, were followed closely. Stressing that they are very committed to lowering inflation, President Powell said that there is still a way to go in interest rates, but it would be appropriate to slow down after a point.
Stating that they took strong measures to reduce demand, the Chairman stated that slowing down the rate hikes was discussed at the meeting, but short-term inflation expectations have increased and a restrictive monetary policy stance will probably be needed for a while longer.
He underlined that long-term inflation expectations are well fixed, but they will act according to the meeting and the incoming macroeconomic data while making their interest rate decisions. Expressing that the slowdown in the rate of increase in interest rates may be in the December or February meeting, but a clear decision has not been made yet, the Chairman of the FED noted that they do not want inflation to ossify.
Stating that he believes the labor market can soften without mass layoffs, Powell emphasized that the labor market remains tight and that price stability is needed for the growth in the labor market to continue.
To sum it up, the message is clearly given that the Committee members do not find the inflation rate, which has fallen from its 41-year peak, to be satisfying yet and that they are quite committed to the 2 percent inflation targets. It should also be noted here that the communication tone of FED Chairman Jerome Powell was hawkish.
President Powell, who signaled that there will be no interruption unless they see a permanent decrease in inflation, stated that they can slow down the rate of increase at some point, but that they need to see the way ahead for this, showing that the bank may consider another 75 basis point increase in interest rates at the December meeting.
However, if the incoming macroeconomic data reveals an optimistic picture, it is understood that the FED Officials may consider a 50 basis point rate hike at the monetary policy meeting in December or February.
Markets were waiting for the Committee's signal to slow down in monetary tightening after the last 75 basis point rate hike. However, the Committee's statement that it is too early to interrupt the monetary tightening cycle may cause the dollar to continue its pressure on highly risk-sensitive assets for a while longer.
