US: Reflections of more tightening phenomenon


If we look at what we have after yesterday; After Powell’s speech, Fed futures funds made progress towards 5 rate hikes by the end of the year and 50 basis points hike in March. The facts set out in the policy text normally did not contain a foul statement, because we were pretty much in agreement about the March issue of the process start. It is appropriate to increase the Fed funding rate in March, bond purchases are ending, and the principles of balance sheet reduction will also be discussed in the next stage. If we look at how necessary and how unnecessary aggression is in the action leg of the business; It turns out that the main issue that bothers the market is the extremity here.

The balance that Powell wants to establish is in the form of an rate hike path that does not harm the labor force and the recovery in growth in monetary policy tightening. Therefore, the inference that the market has made points to a slightly different picture. Interest rates are currently very low compared to the tighter monetary ground to be created. So it’s normal for the Fed to raise rates so that the yield curve slopes right, but how fast and how high? The main problems arise here. The question of inflation needs to be answered from this perspective. Because there is inflation that is well above the target ranges, and there is no clear case on how to solve the supply problems, it is unclear how much inflation may decrease during the year.

The extremeness of hawking comes from this: This reinforcement will be a strong tapering. The downsizing will go along with the rate hike, and the Fed is keeping the range open for more aggressive moves in reducing the balance sheet to its normal liquidity position. In addition to yesterday’s FOMC text on this, a separate policy document has been published. We will do an analysis on this later.

Fed future funds and the possibility of interest rate movements in future meetings… Source: Bloomberg

For the Fed, the implied target funds rate for the year-end was 1.28%, surpassing 4 interest rate positions and completing 5 interest rate zones. 3-4 interest rate hikes will now be a much slower tightening than the market predicts. Looking at the implied rate for March, a shift towards the probability of 50 basis points would bring additional effects, with the just implied funding rate appearing to be 0.40%. The 2-year bond yield has risen to 1.19% as of today, reflecting the high inflation expectation in the short term and rapid tightening steps, while the 10-year bond yield is at 1.83%. It is very possible that the yield gap will widen in favor of the US with the expectation of more aggressive tightening, because the current statements from the ECB are that there is no need to attack or react against inflation at this stage. Therefore, the Fed, which is more willing and tightened on both sides by shrinking the balance sheet, seems to cause an widening in the bond yields in favor of the US in the short term. The basic fact is, how far will the Fed go beyond organic limits in shrinking its balance sheet?

Kaynak: Tera Yatırım
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