Factors in Fed's decision… At the March FOMC meeting, Federal Reserve Chairman Jerome Powell listed hawkish rhetoric to signal his determination to control inflation. From the SEP forecast at the March meeting, or from Powell's words, it's unclear whether the FOMC has adequately acknowledged the unemployment costs or financial market turbulence likely necessary to bring price increases back to target. And at the moment inflation shows no signs of slowing down.

 

The effect of the Fed's moves on inflation expectations… In the medium and long term, the Fed's interest rate moves definitely affect inflation. Stabilizing inflation expectations is important in the following respect; A rising inflation expectation increases expenditures in the short run, and the expectation that prices will rise continuously creates a spiral such as the continuous addition of demand inflation to cost inflation. The low deposit rates in this period reduces the tendency to save and encourages more spending. If we consider that these expenditures become permanent in an environment of unstable inflation, inflation shows even more warming.

 

An increase in borrowing rates leads to a decrease in consumption. Increasing deposit rates encourage more savings. An appreciation of the dollar lowers import prices. In interest-sensitive sectors such as housing, automobiles and durable consumer goods, demand slows down, and demand-based prices cool down.

 

Paul Volcker… Currently, the most severe inflation of the last 40 years is going on in America. The most fundamental struggle with this lies in monetary policy and the control of the money supply. Volcker was Fed chairman in the 1980s who realized he had to crush the economy to contain inflation. Within the framework of the perspective implemented during the Volcker era, the Central Bank increased interest rates sharply and had to endure a shocking decline in growth while normalizing inflation in this way. If supply shortages aren't the only source of inflation, we might worry that it will bring such a drastic policy turnaround from the highest inflation since 1982. In an inflationary situation that erodes income and would otherwise shape consumer and market behavior over the long run, a perspective must be set accordingly. If a stricter policy is required, it will need to be implemented.

 

The Fed funding rate and the course of US inflation in the 1970s and 1980s Source: Bloomberg

 

Conclusion? The Fed's 0.25 point rate hike will be followed by other 0.25 points at other meetings. The most important reason for the rate hike is the fact that the Russia-Ukraine war will put upward pressure on prices. In addition, a downsizing of the balance sheet will start in a close meeting, and in this context, the next meeting on 3-4 May will be very "in the game". In the current scenario, even if the Fed raises interest rates by 0.25 per meeting, we will be talking or will be talking about a severely negative real interest rate on the US dollar. In the US, especially after the pricing of the Russia-Ukraine war, a new inflation wave may rise and double-digit inflation may occur.

Kaynak Tera Yatırım
Hibya Haber Ajansı