OPINION
Market Rating Before FOMC MeetingJan 31
FED Moves Rates to Neutral Level
Noting that the latest expenditure and production indicators have softened in the text of the resolution, the Committee noted that labor market conditions are tight and the unemployment rate continues to remain low. The Committee emphasized that inflation was still on the rise, a result of the pandemic's effects on supply and demand imbalances, higher food and energy costs, and other pricing pressures.
Reiterating that the war in Ukraine exerted upward inflation pressure and weighed on global economic activity, the FOMC expressed its concern about inflation threats.
In the text of the resolution, it was stated that to reach the sustainable 2 percent employment and inflation target, the Committee decided to reduce the federal funds target to the range of 2.25-2.50 percent and that it would be appropriate to continue interest rate increases in the targeted path.
In the text, the text states that the balance sheet reduction will be accelerated as planned in September; Mortgage-backed securities will be reduced by $35 billion per month and Treasury securities by $60 billion per month.
The Committee reiterated its commitment to bringing inflation back to its 2 percent objective and said it would continue to evaluate the impact of new information on the economy as it considered its stance on monetary policy. Finally, the Committee underlined that it will be ready to adjust its monetary policy stance appropriately if risks arise that may hinder the achievement of the targets.
After the decision, US Federal Reserve (FED) Chairman Jerome Powell started his speech by repeating that there was a slowdown in economic activity in general, but the labor market remained extraordinarily tight, and domestic demand remained strong.
Powell said that the FED does not intend to cause a recession since there is no recession currently but there will be evidence of inflation decreasing in the upcoming months. However, using the expression "we expect to see economic growth below the trend for a while", Powell argued that it would be appropriate to slow down the rate hikes at some point. The possibility of another unusually substantial rate increase at the following meeting was still left open, though.
Powell pointed out that interest rates in the 2.25 – 2.50 range are neutral. Noting that the committee also foresees tightening in 2023, he pointed out that by the end of this year, the interest rate may be somewhere between 3.0 and 3.5 percent. The FED Chairman also stated that it might take two to five years for the balance sheet to break even.
FED's critical July meeting shows that; Members are extremely cautious about a possible recession in the country's economy in controlling inflationary pressures. At this point, it should be noted that Powell's communication has softened a bit compared to previous meetings. In particular, Powell underlined that it would be appropriate to slow down the interest rate hike at some point and that the neutral level was reached with the interest rates in the range of 2.25-2.50 percent against the expected inflation of 2 percent. It's a kind of message that it would be appropriate to slow down a little after the Fed's 150 basis point rate hike at its June and July meeting and the toughest tightening move since the early 1980s.
On the other side, Powell's clear communication of the Fed's determination to control inflation and inflation expectations without suffocating the economy is the main factor behind the withdrawal of long-term treasury returns and some recovery in international assets as a first reflex. However, it also means that the dollar, as the reserve currency, will maintain its pressure on assets with high-risk sensitivity for a while, as it reaches neutral real returns.
