Inflation and interest rate expectations… The Fed started the cycle thinking that the economy would be resistant to 6 rate hikes this year. The Powell administration, which is at the crossroads to determine a tighter monetary policy ground within the scope of the fight against inflation, seems to make progress in such interest rate hikes in the future meetings. The median funding rate level projected by members at last week's FOMC was increased to 1.9% for 2022 and 2.8% for 2023. While risks from Russia and Ukraine upset all expectations regarding inflation, the Fed has highlighted its toolkit to ensure price stability and policy predictability, and hopes to manage inflation expectations and pricing behavior in the first place.
Recession risks and tight monetary policy… Updated Fed forecasts show that we are at an aggressive monetary policy tightening pace for this year and next year. Markets are worried about a recession as tensions in Ukraine weigh on the global economy. The Fed predicted 2.8% growth for 2022, slightly behind the previous forecast for economic growth. The central trend for 2022 economic growth in the March SEP was the 2.5-3% range. We see from the economic projections that the Fed is not expecting a recession, but a slowdown. For 2023, the GDP growth is 2.2% in the median and 2.1-2.5% in the central trend. These forecasts show that the Fed sees the risk of recession as minimal in periods when it will implement tighter monetary policy and believes that the momentum brought by the economy is strong.
Fed dots chart interest projections… Source: Bloomberg, Federal Reserve
Inflation uncertainty… The crisis between Ukraine and Russia has also increased inflation uncertainty. Before the Ukraine crisis, the inflation target announced by the Fed for this year in December was 2.6%, but this expectation was revised to 4.3%. The central tendency of the estimates was also increased from the range of 2.2-3% to the range of 4.1-4.7%. The view that inflation will decline from a temporary high due to the supply chain this year has also melted away. The additional supply disruptions and cost inflation caused by the current Ukraine and Russia crisis show that high levels will continue to be observed for a significant part of the year.
Conclusion? As uncertainties and fluctuations in the markets may cause energy and commodity prices to jump in the short term, there will be an upward pressure on inflation. With an effective monetary policy tightening, the Fed wants to act in the direction of protecting the anchors on inflation. The Fed is also now shrinking its balance sheet of about $9 trillion for real impact on monetary tightening, and that plan will likely be revealed at the FOMC in May. For details on the Fed's entire roadmap and plans, it would be useful to take a look at the next statements and the minutes of this meeting, which will be published two weeks later.
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