The stance against inflation… The point where the market drifted after the Fed announced the notes of its December meeting, shows that the March period will not be a subject of much discussion in the rate hike phase. Troubled inflationary waves continue, while we monitor the state of the labor market. The continuation of the growth dynamics and the high inflation indicate that the Fed will not step back from its current policy course.
The labor market… We can still be somewhat concerned about the interaction of the Omicron variant. In December and January, there were serious increases in cases involving global markets. Except for the effects of partial slowdown in the macro data in the economy, there is no complete constraint situation. So the growth momentum continues. We also see some slowdown dynamics in employment for December, but the unemployment rate continues to develop positively. The unemployment rate, which was at the best level of 3.9% after the pandemic, reveals that the recoveries continue, and that there is now a new entry restriction to the workforce, partly due to the coronavirus effects caused by Omicron and the rotation caused by occupational preferences. Some reasons also stem from labor shortages, supply shortages and related production difficulties, as well as the decline in real wages against inflation, which limits labor creation.
Fed funding rate and inflation indicator core PCE comparison… Source: Bloomberg
Fed’s tightening strategy… Rate hikes may increase their frequency at this stage. After the Fed took the first step in March, we think that it will progress in terms of the high inflation pressure and the state of real yields. The movement in real returns will be determined by the balance sheet intervention, which is not fully included in the pricing. Since the Fed is still following the recovery dynamics, it may not want to cause a drastic move at the first stage. Therefore, the marginal effect of the announcements regarding the rate hike will be limited on the yield side. The Central Bank undertakes not to harm the economy’s capacity to do business, while countering inflation in a tightening measure.
Conclusion? The Fed will add new headlines above its hawkish stance on January 26. Progress on the balance sheet strategy will be significant in terms of the extent of the tightening. Markets are assessing the Fed’s further moves, and clarification phenomena in monetary policy reveal “further tightening.”
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