The decisions of the Central banks, especially the Fed, will be very important in guiding monetary policy expectations and market movements. Especially; On the verge of signs of stagflation (stagnant growth within high inflation), such as the recent financial stressors of the global economy and the partial slowdown factors revealed by PMIs, the evolution of monetary policy seems to depend on delicate balances. An update on the timing of the asset purchase reduction is expected at the FOMC meeting, whose decisions will be announced tomorrow.
There are some problems with the data on general economic activity and growth. The most helpful factor in the rapid recovery during the exit from the crisis was the liquidity provided. Now, although a full-closure recession effect is not within the base scenario thanks to vaccination, the persistence of delta wave uncertainty keeps the risks of a pullback in growth active. Taking the latest employment data alone would be an insufficient analysis, because the slowdown in employment growth may also occur in an organic movement. As long as there is no reconstriction effect, there is nothing to worry about in that respect. Delta’s impact was less damaging to hiring than previous waves; A recovery in hiring in September or an upward revision to August will turn the picture positive. However, swinging the monetary policy from ultra-loose to less-loose is a more appropriate strategy in this environment, because the inflation variable we have is compelling and it may be necessary to tighten the conditions a little in order to eliminate the effect from demand conditions. Because this inflation has both uncontrolled pandemic items and supply effects, as well as controlled demand effects.
Against this; The disappointing employment figures in August and the softer-than-expected CPI in August can be considered time-consuming. Normally, the September meetings will always be the driving force for Fed decisions, but this time the variables are different. On the dot plot side, there will probably not be much change, the base scenario on interest rates will be preserved. In that, we will continue to wait for 2023 or perhaps one stage earlier than economic success (for example, at the end of 2022).
With inflation hovering well above 2%, a contraction announcement or hints are expected from the FOMC. It will probably be in the form of a signal, and how much the Fed will include in its policy statement on financial market stress is also important. We’ll look at how far China’s Evergrande real estate market crisis impact and debt ceiling uncertainty can hold the Fed back. There are also uncertainties brought about by the increase in the latest Covid cases. Gaining some time seems plausible, so it can be expected that the first action is left to the November or December meeting and tapering slices to 2022. Announcing in November and fine-tuned mitigation launching in December is also an option. The determinant of this is: At what level does the Fed see the risk of a global contagious slowdown? The potential start date probably won’t be tomorrow, but it’s very likely before the end of the year.
June FOMC meeting dot plot… (Source: Bloomberg, Federal Reserve)
Asset purchases are currently made in the amount of 80 billion USD Treasury bonds (GB) and 40 billion USD mortgage-backed securities (MBS) per month. We said that the Fed is likely to start reducing these tranches in the next meetings. The settings in the policy description will provide very concise conclusions regarding tapering initiation and progression. The sentence about the economic risk balance is important, at this point, the threshold for using policy tools in the Fed’s bilateral scenario analysis will be seen. An optimistic revision will reveal the tapering phenomenon at the next meeting. Updated economic projections will also be important. Compared to the projections in June; growth expectations can be revised downwards, while inflation expectations can be revised upwards. So we will be caught in the crossfire by these two economic criteria. Because slower growth says “no tapering”, while higher inflation says “tapering”.
Kaynak Tera Yatırım
Hibya Haber Ajansı
Kaynak: Hibya Haber Ajansı