OPINION
Market Rating Before FOMC MeetingJan 31
Federal Reserve will lead the Global Tightening Momentum
The Federal Open Market Committee (FOMC) members, who came together for the May meeting of the US Federal Reserve, will announce the decision today at 20:00 (GMT+2).
The Committee is expected to tighten monetary policy by 50 basis points by making the biggest interest rate hike since 2000 in the United States, where inflation is at its highest level in 41 years in the shadow of the economic impact of the war. At its March meeting, the Committee had increased the federal funds target by 25 basis points to 0.25-0.50 percent.
With strong domestic demand as well as supply bottlenecks and supply chain disruptions towards the exit from the pandemic, headline inflation in the world's largest economy has reached its highest level since 1981. The consumer price index (CPI) in the country increased by 1.2 percent in March compared to the previous month and was 8.5 percent year-over-year, the US Department of Labor reported. This is well above the Fed's average target of 2 percent. As a matter of fact, the Fed's personal consumption expenditures price index, known as the inflation indicator, also increased by 0.9 in March compared to the previous month and saw its peak since 1982 with 6.6 percent on an annual basis.
However, the impact of the volatility created by the war on commodity markets here is also quite large. The strong sanctions imposed on Russia due to the invasion of Ukraine led by the United States and western countries caused supply concerns in the markets, causing aggressive rises in the prices of energy, grain and metal, especially crude oil and natural gas. On the other hand, due to the coronavirus lockdown in Shanghai, which has the largest population of 25 million in China, it is inevitable that the problems at the port of Shanghai, an important center of global trade, will also put additional pressure on inflation in the United States, China's largest trading partner.
On the other hand, labor market conditions in the United States are quite tight. According to data published by the Department of Labor, nonfarm payrolls in the United States increased by 431k in March, while the unemployment rate fell to 3.6 percent. Nonfarm payrolls had increased by 467k and 678k respectively in January and February.
It is highly likely that the Fed will tighten its monetary policy by 50 basis points in order to calm the commodity market to some extent and to control aggregate demand and expectations, without ignoring the supply-side factors in the inflation outlook beyond the monetary policy influence. We believe that the Fed will avoid a hike above 50 bps as it may shake the markets deeply. Also, the Federal Reserve is likely to announce the process of shrinking its $8.94 trillion balance sheet today. Committee members had considered the reduction for the $60 billion treasury note and the $35 billion mortgage-backed securities at the March meeting.
FED Chair Jerome Powell, who will have a press conference at 20:30 (GMT+2), is expected to announce the details of the plan for a strong balance sheet contraction process. In particular, Powell's assessments of the severity of future inflationary pressures will play a decisive role in asset prices as he will most probably give signals about the future rate hike decisions.
The Committee is expected to tighten monetary policy by 50 basis points by making the biggest interest rate hike since 2000 in the United States, where inflation is at its highest level in 41 years in the shadow of the economic impact of the war. At its March meeting, the Committee had increased the federal funds target by 25 basis points to 0.25-0.50 percent.
With strong domestic demand as well as supply bottlenecks and supply chain disruptions towards the exit from the pandemic, headline inflation in the world's largest economy has reached its highest level since 1981. The consumer price index (CPI) in the country increased by 1.2 percent in March compared to the previous month and was 8.5 percent year-over-year, the US Department of Labor reported. This is well above the Fed's average target of 2 percent. As a matter of fact, the Fed's personal consumption expenditures price index, known as the inflation indicator, also increased by 0.9 in March compared to the previous month and saw its peak since 1982 with 6.6 percent on an annual basis.
However, the impact of the volatility created by the war on commodity markets here is also quite large. The strong sanctions imposed on Russia due to the invasion of Ukraine led by the United States and western countries caused supply concerns in the markets, causing aggressive rises in the prices of energy, grain and metal, especially crude oil and natural gas. On the other hand, due to the coronavirus lockdown in Shanghai, which has the largest population of 25 million in China, it is inevitable that the problems at the port of Shanghai, an important center of global trade, will also put additional pressure on inflation in the United States, China's largest trading partner.
On the other hand, labor market conditions in the United States are quite tight. According to data published by the Department of Labor, nonfarm payrolls in the United States increased by 431k in March, while the unemployment rate fell to 3.6 percent. Nonfarm payrolls had increased by 467k and 678k respectively in January and February.
It is highly likely that the Fed will tighten its monetary policy by 50 basis points in order to calm the commodity market to some extent and to control aggregate demand and expectations, without ignoring the supply-side factors in the inflation outlook beyond the monetary policy influence. We believe that the Fed will avoid a hike above 50 bps as it may shake the markets deeply. Also, the Federal Reserve is likely to announce the process of shrinking its $8.94 trillion balance sheet today. Committee members had considered the reduction for the $60 billion treasury note and the $35 billion mortgage-backed securities at the March meeting.
FED Chair Jerome Powell, who will have a press conference at 20:30 (GMT+2), is expected to announce the details of the plan for a strong balance sheet contraction process. In particular, Powell's assessments of the severity of future inflationary pressures will play a decisive role in asset prices as he will most probably give signals about the future rate hike decisions.
