OPINION
Market Rating Before FOMC MeetingJan 31
FOMC Minutes to Signal Fourth 75 Bp Interest Rate Hike
At its September meeting, the FOMC increased interest rates by 75 basis points for the third time in a row, reducing the federal fund target to the range of 3.00 - 3.25%. In its statement, the FOMC stated 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 further interest rate hikes would continue in order to achieve the 2% target in the long term.
As a matter of fact, in the Economic Projections Report published with the meeting in question, the interest rate predictions of the Committee members were determined as 4.4% for this year and 4.6% for 2023. This means the Committee's tightening of 125 basis points by the end of the year and 25 basis points in the new year. However, the report also revealed that members' forecast of gross domestic product (GDP) fell sharply from 1.7% to 0.2% for this year.
In today's minutes, it is very important for the markets that the members evaluate which factors will cause a slowdown in the growth outlook of the US economy. In other words, the risks to the growth outlook will be a kind of signal of the possibility that the recession in the world's largest economy may spill over into the third quarter.
At this point, the answer to how much longer members can bear the recession risks while controlling inflation will be one of the most important signs that the markets will look for in the minutes. In particular, the message of how many more meetings the Committee can maintain the current monetary tightening momentum in its efforts to include inflation in its targeted path can be included in these minutes.
On the other hand, it is known that inflation in the USA has regressed from its peak of 41 years. The question of "Can the Committee downshift in monetary tightening" against the headline inflation, which fell to 8.5% and 8.1% in July and August, respectively, after reaching its highest level since 1981 with an annual rate of 9.1% in June, is the subject of these minutes.
On the other hand, there is a selling wave in the global bond market. The dollar, supported by the US 10-years, which reaches up to the psychological 4%, puts pressure on the currencies of the major countries. Particularly, the attitude of the members towards the possibility that the strong rise in bond yields will create a debt problem in the countries that are the biggest trading partners beyond the USA, is extremely critical. In addition, evaluations regarding the impact of the high volatility in the British markets on the US markets will be followed.
To sum it up, the Committee's strong pointing to a further 75 basis point interest rate hike at its November meeting by sticking to its anti-inflation path could increase the dollar's weight on major country currencies and stock markets. If the Committee gives a message in the direction of aggressive tightening, which will be the 4th and last, it may trigger a recovery in the investor risk atmosphere.
