Yesterday, Professor Mahfi Eğilmez and I delivered warnings about rate cuts both on social media and television. “Another monetary expansion would lead to the government to neglect structural reforms.”
Let’s begin with forecasts before the release of the Fed decision. Although some experts expected a 50 bps rate cut, there were no reason whatsoever for a cut at such level, let alone the fact that a 50 bps cut would not be compatible with the Fed’s traditional approach. So, Fed had two options: either a 20 bps rate cut or no cut at al. obviously, each of these options could bring some potential complications.
If rates were left intact, all institutions and investors that have taken positions for a 25 bps rate cut would suffer serious loss. In this case, an incoordination would arise between countries following a rate cut trend and developing economies. Fed’s refusal of rate cut would cause some raised eyebrows especially when many countries, including Turkey, are cutting rates.
On the other hand, another 25 bps rate cut after the Fed’s last meeting led to expectations for a downward trend in interest rates. Even though Powell explained that this is not a trend, expectations grew to an even higher level. Markets will first be happy and they will ask this question: “I wonder whether there are any risks on the horizon considering the fact that the Fed continues rate cuts”. As a result, Trump will not get what he wants. On the contrary, dollar will start appreciating, or to be precise, it has already begun to appreciate.
In short, unchanged rates could have caused some problems in the short-term but it would be an important step in the medium and long term. If Fed decides to cut rates one more time, markets will have to face some complications in the medium and long-term even though investors would be pleased by this decision in the short term. We better get ready for another rate cut. And to top it all off, if Fed wishes to expand money and credit, governments in some countries, that fall behind with justice, education and human rights, especially Turkey, would get unnecessarily comfortable. If we enter an era of “abundance” again, countries with negative rating for structural reforms would not do their homework under the pretext of “We no longer need to offer a convincing narrative. Foreign capital flows into the country after all”
“If only Fed could resist pressure….”
I’ve repeated so many times before that it was only a slight possibility for the Fed to keep the rates intact while facing such huge pressure. As I said earlier, I think multiple parameters would collapse in the medium and long term, even though markets and the governments get what they wished for. I hope we won’t have to face a monetary expansion, otherwise, it will be inevitable for Turkey to move away from the modern standards it should have adopted a long time ago. Poor, despaired “excess money” won’t know where to go, paving the way for Turkish government to focus on Mega Project again. Once again, destroying ecological balance and the nature, Turkey will use the resources so it can boast about the high growth instead of ‘development’.
I thought both the government and the private sector had agreed upon the fact that they should further invest in digital infrastructure, education and technology. I thought Turkey finally understood that the only way to build a bright future is design, develop new things, and create values. Turkey had to go through countless crises until it finally, in this case seemingly, comprehended that it’s not the buildings that help a country thrive, it is the people.
In conclusion, despite what everybody thinks, I would like to once again underline that another rate cut by the Fed would deteriorate in medium-term Turkey’s previous actions to heal market balance as well as development progress.
