The stagflation conjuncture… The inflation perspective that central banks underestimated last year caused the late policy tightening to coincide with perhaps the worst recession concerns since Lehman Brothers. Currently, central banks such as the Fed and the ECB are experiencing policy tightening with bidirectional clamping, and paying attention to inflation dynamics alone could have critical growth implications. While this perspective questions the continuity of interest rate hikes, it also shows that the rates at which Central banks should stop should not be too far away.

Changing balances in monetary policy… As is known, the Fed is considering increasing interest rates by 75 or 100 bps on Wednesday. Market consensus, Central bank officials and reality throw different dynamics. However, the macroeconomic perspective is stuck between growth and inflation. Market indicators are moving forward, reflecting that the bond investor is expecting a recession and that the Fed will have to loosen policy in the long-term perspective. This easing effect will be more pronounced in more fragile economies such as China and Europe.

Fed funding rate and CPI comparison… Source: Bloomberg

Emerging markets perspective… Volatility in CDSs and currencies will likely increase. Currently, there is a significant increase in CDSs in Russia and countries that will be more exposed to the energy crisis (Eastern Europe group for example). A possible energy crisis will worsen the situation. On the other hand, the Fed's disregard for indicators other than inflation will generally create a capital outflow effect on developing countries, where nominal interest rates do not work at current level, as the US will now increase its weight as a serious investment alternative. We estimate that if the market will be in demand for security, it will not show interest in fragile markets that will be susceptible to more than one crisis.

Conclusion? In order for inflation to decline qualitatively, the current decline in commodity prices must be sustained. Other factors, on the other hand, can be divided into two groups based on the base effect and policy tightening. We have to monitor demand-based indicators in order to be sure of the monetary policy-induced decline in inflation, and if the details that see the growth losing momentum are similar with the inflation decline on the basis of sub-items, the Fed can be said to have been successful. Of course, if we are to consider the Fed's success criterion only as reducing inflation. Even if there is a decrease due to the base effect, inflation seems to remain above 2% in the predictable forecast horizon.

Kaynak: Tera Yatırım
Hibya Haber Ajansı