Rates hold at zero, two hikes project to the end 2023


In general, the Fed meeting seems to have passed in a mood that highlights the “tapering” expectations and shows that the fundamentals that can settle on a faster basis are maturing. While the economy is recovering and inflation, which is the main condition, is in the process of advancing to more alarming dimensions, the dot chart, which can tell us something factually, indicates that there are some members moving to earlier periods and higher interest positions.


If we look at the content of the policy statement and the changes; “Advance in vaccines has reduced the spread of Covid-19 in the US” and “Economic activity and employment indicators have strengthened with this progress and strong policy support”. As for the increase in inflation and the related policy practices; “Inflation rose, largely reflecting temporal factors. Overall financial conditions remain harmonious, in part reflecting policy measures to support the economy and the flow of credit to US households and businesses.” Regarding the general recovery of the economy and the epidemic conditions; “Progress on vaccines will continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook will remain.” In other words, we see that an annotation has been made regarding the economic risk balance, but as reflected in the economic projections, we are in a better position than the outdated statements of the previous meeting.


The Fed increased the IOER (interest paid on the money banks hold in their Fed accounts) and reserve requirement ratios. With the liquidity withdrawn from the market within the scope of reverse repo transactions, we have been stating that the Fed has started technical adjustments for a while. We understand that the global USD liquidity is due to the fact that the swap lines provided to other Central banks will continue until the end of the year. On the other hand; The commitment to maintain monthly asset purchases of 120 billion USD continues until “significant progress” is made in terms of inflation and employment. On economic progress; The cautious stance in the risk balance remains, but the picture regarding vaccination is more optimistic and in this context, factors such as the continuation of economic openings and the development of employment growth will come into question as progress is made in vaccination. The improvement in employment has the potential to bring the Fed to the next level more quickly for the tightening phase of “harmonizing financial conditions”.


The Fed has set its inflation forecasts until the end of 2023. Officials see their preferred measure of price pressure in 2021 is up 3.4%, compared to March’s forecast of 2.4%. The 2022 forecast was increased from 2% to 2.1%, and the 2023 forecast was increased from 2.1% to 2.2%.


The issue of inflation is multidimensional and the main problem stems from supply bottlenecks. In other words, inflation, which will be damped by reducing demand to normal conditions, will again be much higher than the Fed’s target. The more difficult procurement phase also results in longer delivery and price stability is affected. High demand in tight supply conditions keeps this price balance up. The slowing effect of the long-term stock turnover rate of the unmet demand on the manufacturing industry is an important risk. The CPI indicates a higher-than-expected warming in the last two months. Of course I’m not old enough for Volcker-era inflation, but right now we may be getting close to being referenced in my economic history courses and case studies. On the commodity rally, future prices, especially long-term prices, will give us more evidence than spot prices. Of course, longer term will be expensive due to contango, but the further north the slope in the price curves goes, the more inflation fears will be fed. Most importantly, oil, copper and iron/steel prices…


The FOMC raised its economic growth forecasts. Gross domestic product was revised to 7% this year from the previous estimate of 6.5%. The 2022 growth forecast was kept at 3.3% and the 2023 forecast was raised to 2.4% from 2.2% in March. The median estimate for unemployment at the end of 2021 remained unchanged at 4.5%, and the median estimate a year later was reduced from 3.9% to 3.8%. The 2023 forecast was kept at 3.5%.


The reflection in the interest projections, which is the most crucial point of the work, reveals that the tug-of-war between hawks and doves within the Bank has developed in favor of the hawks. 13 out of 18 officials favor at least one rate hike by the end of 2023 (was 7 at the March meeting). 11 officials expect at least 2 rate hikes (some expect more rate hikes, this is the median forecast, that is, the range with the most dots). For a period as early as 2022, 7 members expected rate hikes.


As a result; There is an increasing hawkish Fed against the dovish Powell and the positioning for the new period seems to mature in the future in line with the technical adjustments. FOMC is not through action; it would be read over the policy statement and dot plot and it was just like that. After the FOMC, the 10-year bond yields rose to 1.57% in the first hour. Developing countries will need to take into account the risk of “early tapering” in adjusting their financial conditions.


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