What the latest Fed rate hike means for Türkiye's economy - LEVENT YILMAZ

What the latest Fed rate hike means for Türkiye's economy

Although its importance is not fully known domestically, the June meeting of the U.S. Federal Reserve, which emerging economies like ours have to follow carefully, was held last Wednesday.


WHAT DID THE FED DECIDE?

At the last meeting, the Fed increased interest rates by 75 basis points for the first time since 1994. In fact, the Fed had signaled in the previous meeting that it would raise interest rates by 50 basis points.

However, the fact that the well-above-expectations U.S. May inflation rate of 8.6% and future commodity price forecasts were crucial in the FED decision.

Meanwhile, the balance sheet reduction program initiated by the Fed in June continues at 47.5 billion dollars per month. It was stated that the effect of this contraction would coincide with the effect of the 25 basis point rate hike. So the sum of the Fed's steps this month technically translated into a 100 basis point rate hike.

WHAT COMES NEXT?

Fed Chairman Jerome Powell, who held a press conference after the decision, also hinted at a 175 basis point increase in interest rates until the end of the year. However, we also know that the Fed will narrow its balance sheet by around 520 billion dollars by the end of the year. An increase of 50 or 75 basis points seems possible at the next meeting. The Fed will then tighten more and more, which will continue to push the Dollar Index higher.

The Fed also revised its forecasts for the upcoming period. For example, the growth forecast of the U.S. economy, which stood at 2.8% in March, was slashed to 1.7% at this meeting. The 2023 growth forecast was reduced from 2.2% to 1.7%; The 2024 forecast was revised from 2% to 1.9%. In addition, the unemployment forecast, which previously stood at 3.5% for this year, was revised to 3.7%.


IS A RECESSION LURKING AROUND THE CORNER?

Fed Chairman Powell answered this question in the negative. However, market expectations see the tightening of the FED policy as “too little too late” in the fight against inflation that will result in a recession this time. In other words, there is not much trust in the "soft landing" scenario that Powell described.

The reverberations from the highest interest rate hike since 1994 on Wall Street were not very positive either. For example; Institutions like Wells Fargo, Moody's, and Guggenheim say tightening could result in a U.S. recession.


WHAT MUST DEVELOPING COUNTRIES DO?

So far, I wanted to summarize what the Fed has done in the past and what it is currently doing. Now let's take a look at how the rest of the world will be impacted by its decisions. It looks like the Fed will continue to rapidly tighten its policy. This tightening will continue in the form of increasing interest rates on the one hand and narrowing the balance sheet on the other. This situation will gradually amp up the pressure on the developing economies, particularly Türkiye when it comes to the issue of the dollar exchange rate. In this respect, developing countries need to increase the number and impact of policy actions that will reduce the pressure resulting from a stronger greenback.


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