Powell's Jackson Hole speech, which was given much importance and in which many regional presidents talked about the phenomenon of "tapering" as if unanimously, contains explanations that comply with the current logic of monetary policy. Powell said the central bank may start reducing monthly bond purchases this year, but will not be in a hurry to raise interest rates from now on (tapering will be this year anyway, rate hike will be much later, we know that). The rationality that constitutes the theory of monetary policy is basically as follows; the economy has met the test of "significant progress" towards the Fed's inflation target and the labor market has made "clear progress". If we take a look at the prominent titles in the Powell statement;
· It may be appropriate to start slowing the pace of asset purchases this year. The intervening month has seen further progress in the form of a strong employment report for July, while also allowing the Delta variant to expand further.
· The timing and pace of the decline in asset purchases will not be intended to provide a direct signal of the timing of the interest rate hike, for which we have announced a different and significantly more stringent test.
· We said we would continue to keep the federal funds rate target range at current level until the economy reaches conditions compatible with maximum employment and inflation reaches 2% and has been on track to moderately exceed 2% for some time.
· We have a lot to address to achieve maximum employment and time will tell whether we reach 2% inflation on a sustainable basis.
· The current inflationary wave will likely be temporary. The latest increase is the product of a relatively narrow group of goods and services “so far largely directly affected by the pandemic.”
· While the underlying global disinflationary factors are likely to develop over time, there is little reason to think that they have suddenly reversed or diminished. It seems more likely that they will continue to weigh in on inflation as the pandemic makes history.
At the FOMC meeting in July, we saw that the central bank agreed that it would probably be appropriate to start cutting back on its 120 billion USD per month bond-buying program before the end of the year. The sum of the views we've seen from many Fed officials today suggests they're in the process of pushing for a move as soon as next month. September, October and December meetings are the periods when tapering can be started depending on the course of the economy, but September seems a little more likely if we do not encounter situations that will pose great risks for the economy. Powell clarified the difference between “QE tapering” and “rate hike”, which we can logically distinguish, as the Fed wants to finalize purchases before it starts raising interest rates. As the Fed combined its funding rates, which it had already cut to zero last year, with its ultra-wide bond purchases amid the pandemic crisis; We can easily foresee that the interest rate will not increase in the first place during the transition of monetary policy from ultra-loose to less-loose. The time shift will be determined by the Fed's concern over inflation; An inflation situation that will stay above the 2% target for a long time may shift from 2023 to the end of 2022 if stabilization takes place in a longer period than anticipated. In the tapering period, we are now interested in this, we discuss it. Dot chart showed the year 2023 as the median in June, although the dots were very dispersed. Forecasts will be updated again at the September meeting.
Now, we said how soon the rate hike might be depends on the Fed's inflation concerns. At this point, it will be necessary to underline the different directions in inflation expectations in terms of short and long term. Inflation was going to be high for a while in order to meet the 2% target of the Central Bank on average, but external factors (raw materials, chips, technological components, energy, freight, transportation problems caused by the pandemic, global inflation) caused it to deviate a lot from this average. In fact, the purpose of introducing this target was to compensate for low inflation during the recession in subsequent recovery periods. Now the Fed's credibility comes not only from being the world's largest central bank, but also from its long-term predictable policy path and communications. At this point, at the stage of achieving the inflation target, the reaction to this fluctuation is obvious. Transitioning from the beneficial effects to the toxic effects of QE also needs to be transformed in the right place, so despite the economic turmoil, the Fed will downgrade the QE ground a bit.
We have mentioned the inflationary effect of wages many times before. Wages are more important for households that can maintain their position in inflation in maintaining economic balances. Also, the increase in wages indicates that firms are relieved, as a result, they earn more, which is why they pay more. For inflation, it is necessary to pay attention to its own trend – although this issue is more valid for countries with unstable inflation – high inflation can affect pricing behavior. In fact, there is a situation where the impulse-response degrees of the main economic indicators originate from themselves in the early periods, revealing the relationship of the relevant indicators with other indicators in the long run. In other words, the ability to reduce short-term inflation will also affect long-term expectations.
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