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Fed: Powell emphasizes “advancement in inflation, more frequent and larger rate hikes”

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Highlights from the Powell speech;

 

·        I don’t expect the supply chain issues to be fully resolved by the end of the year, but I do expect progress.

·        There is a risk that the high inflation we see will be long-term, there is a risk that it will rise even more. We must be in a position to consider all possible ramifications for our monetary policy.

·        Monetary policy needs to be “agile” to deal with risks to price stability and maximum employment goals.

·        We are not trying to keep inflation below 2%, we want inflation expectations to be fixed at 2%.

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·        Growth is expected to be well above potential this year.

·        A major threat to the labor market is high inflation. High inflation also strips away the benefits of large wage increases.

·        We monitor but do not control the slope of the yield curve.

·        The economy is quite different this time from the last tightening cycle in 2015.

·        We intend to increase interest rates in March.

 

While Powell’s statements are a little more hawkish than expected and reveal his desire to raise interest rates in March, he also leaves the door open for the Fed to increase rates more often and faster than expected. While the Fed’s policy text has a balanced structure emphasizing the “dependency on data” phenomenon, the Fed’s proactiveness in taking control is at the forefront in Powell’s statements. For this reason, we observe a tendency towards a new understanding that the Fed can go beyond 4 rate hikes during the year. Under these conditions, by the end of the year, the Fed may have increased interest rates five times. However, if the movement in March is 50 basis points, the fluctuation in rates will be the focus, not the number of rate hikes.

 

Since the structural nature of inflation and economic progress differed more than the 2015 model tapering phenomenon, it was clear that the Fed would move faster than before. They just gave the signal to move a little faster than expected with respect to these dynamics, at basic equilibrium. The Fed sees a sufficiently strong labor market as it looks at the situation and doesn’t want inflation to hurt it. While coping with inflation, they emphasize the factors such as reducing the corrosive effects of wage increases and protecting the economic situation of households. They also have to avoid the risks of the extreme tightening cycle, but it seems that the interest rate path will be used to control the inflation operating through the private consumption and housing market and to stabilize the expectations.

 

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

 

The Fed will raise interest rates on March 16. On June 15, the first steps to shrink the balance sheet will be added as a reinforcement to the rate hike. In balance sheet reduction rounds, our expectation is to reduce mortgage bonds in the first place in addition to predictable and natural cuts through redemptions. The Fed will monitor the 2 and 10-year spreads in its movement in long-term bonds.

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