Market Rating Before FOMC Meeting

Market Rating Before FOMC Meeting

Actors in global markets focused on the critical meeting of the Federal Open Market Committee (FOMC) on January 31 - February 1. Market expectations for the meeting, which will end tomorrow, are to reduce the monetary policy tightening rate to 25 basis points.

The FOMC, at its December meeting on 13-14, increased interest rates by 50 basis points, bringing the federal funds target to the 4.25-4.50 percent range. With this increase, the FOMC tightened its monetary policy by a total of 425 basis points as of March, raising the interest rate to the highest level in 14 years. 

At this point, despite the war in Ukraine and tight financial conditions, economic activity in the USA still continues to be resilient. According to data released by the US Department of Commerce last week, the country's gross domestic product (GDP) grew by 2.9 percent in the fourth quarter compared to the previous quarter, against market forecasts of 2.6 percent.

The personal consumption expenditures price index (PCE Deflator), published on Friday, increased by 0.1 percent in December compared to the previous month and decreased to 5.0 percent on an annual basis. In this period, the core PCE was realized as 4.4 percent compared to the previous year, in line with the market expectations. The data released confirmed the FOMC's 2 percent inflation target path, while also creating the opportunity to be less aggressive in tightening monetary policy. From this point of view, it was observed that the improving investor sentiment in international markets (VIX: 19) weighed on the dollar while supporting assets with relatively high risk sensitivity.

But after tomorrow's meeting, the meeting of Federal Reserve Chairman Powell will be critical. While the markets have almost completely priced in the expectation of a quarter-point rate hike in two consecutive meetings, at this point, President Powell's leaving the door open for a 25 basis point tightening cycle may reverse the main pricing story. On the other hand, Powell's pointing out that the tightening has come to an end in line with the forecasts may contribute to the positive outlook in the investor risk atmosphere.