Now that we’ve dealt with the first issue in this way within the base scenario, let’s look at the main issue: The main issues we were going to cover were how to move the projected ceiling interest rate and how long the interest rates would stay at the determined ceiling level. The need to increase interest rates, albeit at a slower pace, aims to reduce stubborn-looking high inflation.
For this, looking at the concentration of economic forecasts on future inflation and employment, of course, gives an idea about the future monetary policy path. In order to dampen the inflation effect caused by wage increases, the employment market should stagnate and demand movements should decrease accordingly. The Fed will create the inflation reduction equation by taking into account the economic cooling and it wants to determine the optimal interest rates accordingly.
If we look at the highlights from the Fed statement;
The Committee anticipates that continued increases in the target range would be appropriate for monetary policy to adopt a restrictive stance that would drive inflation to 2% over time.
Fed members expect the policy rate to be 5.1% by the end of 2023, 4.1% by the end of 2024 and 3.1% by 2025. (Previous September projections 2023: 4.6%, 2024: 3.9% and 2024: 2.9%)
The interest rate decision was made by consensus (no opposition, the easiest part).
Growth expectations were 0.5% (September: 1.2%) for 2023 and 1.6% (September: 1.7%) for 2024.
The unemployment rate is projected to rise to 4.6% in 2023 and 2024 (September estimates 2023 and 2024: 4.4%).
PCE inflation is expected to be 3.1% in 2023 (September: 2.8%) and 2.5% in 2024 (September: 2.3%).
Fed’s December Dot Plot… Source: Federal Reserve, Bloomberg
The Fed’s dot chart, which the US central bank uses to outline its view of the interest rate path, shows that the median 2023 forecast for the federal funds rate has risen to 5.1%. The forecast for the end of 2024 is 4.1%. Such a 2023 projected path not only placed the ceiling interest rate slightly above the expected threshold, but also probably sent the timing of the first rate cut beyond 2023 in terms of the duration of interest rates. This shows that the optimism after the US inflation data may be replaced by a Fed perception that does not give up. A more hawkish understanding prevails than expected.
Of course, Powell’s statements are important at this point. There is an emphasis that the interest march is not over. On the other hand, the Fed’s slower pace is more appropriate in terms of analyzing the current inflation path and the results of cumulative tightening. As inflation falls, policymakers will increasingly find that cumulative tightening is working.
As a result, a Central bank stance that wants to observe the effects of the actions means that interest rate increases will lose momentum, but there is a possibility that the ceiling interest will occur at higher levels due to the validity of sufficiently restrictive rates. We have to monitor dynamic developments depending on the data, and in a sense, the abstaining approach we expect is valid in this regard.
Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı