In Powell's speech to the Senate Banking Committee, we see that the fight against inflation, the use of tools and the assurances of not harming the economy while doing this. We observed that the path followed by the monetary policy took a tighter path in order to control the increase in inflation, and we also predicted that the Fed would avoid actions that would lead to a hard stance in the economy. Therefore, it is useful to consider the facts that the Fed has not fully communicated so far as new information in the situation assessment. If we look at Powell's statements;
If we have to raise interest rates further over time, we will. We will use our tools to reduce inflation.
A long expansion will be required to achieve the kind of very strong, highly engaged labor market we want. We will need price stability to achieve a long expansion. And in a way, high inflation is a serious threat to achieving maximum employment.
The balance sheet is much larger and therefore the flow can be faster. So I would say it could be earlier and faster.
Of course, the Fed's overheating of the economy with bond purchases and excess liquidity in an inflationary environment is of course a concern. Therefore, we can state that there are bilateral but asymmetrical risks. The Fed will end the expansion, because an overheated economy will bring permanent inflation in this environment. It becomes difficult to deal with inflation after a point, because the consumer and pricing behaviors it creates also cause internalized inflation. Therefore, keeping inflation under control without stopping growth, and a reasonable quick tightening in relation to this aim is an appropriate plan. It's not about cutting liquidity, it's about cutting excess liquidity. That is, to normalize liquidity. This is what the Fed will pay attention to.
Fed members are very openly presenting the rate hike phenomenon to the market in March. However, Powell is more cautious about this, at least being careful about highlighting a time. While Powell stressed that the Fed has not prioritized its mandate over price stability in congress over the full employment target, he said the emphasis could shift and the focus is now more on inflation. In the 25-26 January Fed meeting, the first interest rate hike phenomenon comes up very clearly, the issue of how the balance sheet reduction will support this rate hike is important. Powell also referred to the Fed's $8.77 trillion balance sheet reduction during the year, but he did not fully reveal a timetable regarding this. The Fed started shrinking the balance sheet in 2017 after ending QE last time in 2014, but recent comments from members indicate that assets could be cut soon after QE ends.
Rate expectations pricing of Fed futures funds… Source: Bloomberg, CME Fedwatch
If we look at what we have in terms of full employment and high inflation; Prices rose 5.7% in the 12 months ended November, according to the Fed's preferred benchmark, the PCE price index. The US unemployment rate fell to 3.9% in December, closest to the pre-pandemic low of 3.5%. Pricing that the Fed will begin raising the benchmark fed funds rate in March, two years after reducing it to nearly zero at the start of the pandemic in March 2020, is at 88%, as Fed futures funds show. The baseline scenario is for the Fed to raise interest rates three times in 2022.
Kaynak: Tera Yatırım
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