The ınflation threat case

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High inflation… Economic data may contain a concept where rising inflation, weak consumption and increasing geopolitical uncertainty are intertwined, which will cause some policy reservations. On the other hand, it is clear that the Central Bank’s aggressive approach to rate hikes stems from the threat of high inflation. The ongoing increase in commodity prices due to limited supply causes inflation to remain higher and higher.

 Fed policy reservation, inflation and employment balance… The Fed’s main monetary policy target is to create a compressed inflation image at the moment. Therefore, it is in a positioning that evaluates the aggressive tightening cycle. There are also concerns about the potentially harmful effects of QE, with inflationary effects that could go further than the revival of growth. On the other hand, there is a reservation that if the tightening is excessive, it may harm the hard landing in the economy and the increase in employment. The December CPI report showed prices rose 7% year-on-year, the largest increase in nearly four decades. The labor market also continues to move towards “maximum employment” with the unemployment rate falling to 3.9%.

We believe the FOMC should see a sudden slowdown in inflation to curb a rate hike in March. While hiring is likely to stumble under Omicron’s weight in January, the current wave of cases is likely to exacerbate current supply challenges for labor and goods. Therefore, inflation is likely to continue to surprise upwards.

Comparison of the area covered by the Fed balance sheet in GDP and inflation… Source: Bloomberg

 Conclusion? With the FOMC increasingly concerned about inflation, we await its January post-meeting statement to signal that the federal funds rate may be increased at its next meeting, March 15-16. Such a clue could come by showing that the labor market is near maximum employment. If the temporary slowdown in growth due to the latest virus wave is downplayed in the statement and the overall strength of the labor market is emphasized, it will be understood that the Fed is also comfortable in tightening. If inflation stands at 7%, continuing with supportive liquidity is an unsustainable phenomenon.

Kaynak: Tera Yatırım
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