OPINION
Market Rating Before FOMC MeetingJan 31
Powell: We'll Have to Consider Acting Aggressively
The fluctuation created by the Russia-Ukraine war in the commodity market, especially in energy and grain products, supply bottlenecks, and supply chain disruptions exacerbated by the coronavirus precautions in China, caused the global economy to encounter a strong inflationary environment after many years.
At this point, the USA, which is the largest economy in the world, is experiencing the highest price increases in 41 years. According to the data reported by the Ministry of Labor; The consumer price index (CPI) in the country increased by 0.3 percent in April compared to the previous month, while it increased by 8.3 percent on an annual basis.
As a matter of fact, the US Federal Reserve (FED), which guides the global monetary policy momentum, has started the monetary tightening process in order to prevent inflation from solidifying.
One step back: At the second meeting of the year held on March 16-17, the FED increased its federal funds’ target by 25 basis points for the first time since November 2018. At the May meeting, the bank tightened its monetary policy by 50 basis points and pulled the federal funds' target to the range of 0.75 - 1.00 percent.
In the evening hours of the day we left behind, FED Chairman Jerome Powell made evaluations on monetary policy at an event organized by The Wall Street Journal.
President Powell pointed out that developments outside the country, such as the Russia-Ukraine war and the coronavirus quarantines in China, cause uncertainty in the economy, and said that these may pull growth down and push inflation up.
While Powell stated that they will "wink at" to the effects of the policies to be implemented to control the CPI, slowing economic growth or increasing unemployment, he emphasized that there are ways that price increases will lose power without creating a comprehensive "recession".
Noting that they have the tools and determination to control inflation, they will continue to tighten monetary policy, Powell stressed that they may have to act ‘more aggressively’ if they do not see ‘clear and convincing evidence of a fall in inflation.
Reminding that the bank had increased interest rates by 50 basis points in its last meeting, the President underlined that those who did not hesitate to raise interest rates above neutral rates conveyed that the idea of increasing by 50 basis points in the next two meetings received widespread support from FOMC members. Finally, the FED Chairman added that they closely follow macroeconomic data and conditions and that they will also closely follow the impact of the actions to be taken on the economy.
On the other hand, hawkish statements from the members of the FED management council have been followed. Known as the representative of the hawk's wing of the bank, St. Louis FED President James Bullard, while describing the most important issue for them as inflation, emphasized that this is a good reason for 50 basis point rate hikes in the next meetings. It should be noted here as a footnote that Bullard was the only member who voted for a 50 basis point rate hike at the FED's March meeting.
Subsequently, Cleveland FED President Loretta Mester stated that inflation has not peaked yet, the FED is on the way to increasing interest rates aggressively and will increase interest rates by 50 basis points in the next 2 meetings, while San Francisco Fed President Mary Daly supported the 50 basis point rate hike. However, Daly noted that a 75 basis point rate hike at the moment is not their priority.
It is accepted in the markets that many of the members of the Federal Open Market Committee (FOMC) now support the aggressive policy movement in order not to solidify the inflation, which is at the peak in 41 years in the world's largest economy. However, a 75 basis point rate hike is a matter of discussion at this stage. In the monetary tightening process implemented by the FED to put the growth of the US economy on a stronger track, a 75 basis point rate hike may raise recession concerns.
On the other hand, a 50 basis point interest rate hike, which will be the strongest tightening move since 2000, is considered certain at the June meeting, while the pressure of the dollar on asset pricing is observed. With the sales wave in the global bond market, the benchmark US 10-years exceeded the psychological level of 3.00 percent again.
The dollar index regressed slightly from the 20-year peak of 104.88 and maintained its strong appearance around 103.35, the SP500 index, which started the day with 4 094, dropped to the level of 4 050 with a decrease of 1 percent. The index hit its lowest level in 14 months with 3929 points on May 12.
