Fed decision leads to joy first, and then to panic…

The Fed decisions came in just I was about to make a deeper analysis of inflation in Turkey. As a matter of fact, it was in 2008 where the Fed had cut rates in a rare inter-meeting move. Everyone thinks now that things must be going pretty awful.

In my previous reports, I have said many times that the negative real interest rate is not the right solution to improve GDP growth. My opinion remains unchanged.

Unfortunately, Federal Reserve implemented a 120-month monetary expansion period to overcome the economic slowdown which had started in 1998, thus triggering the 2008 financial crisis. Fed has been financing the markets for 135 months now since that crisis. And yesterday, the central bank reduced its overnight rate to 1.25% from 1.75%. This move might cause American Companies to go further into debt, especially now that US public sector borrowing hits record highs.

Dollar depreciates again for the first time in a long time following Fed’s rate cut. And the reason why dollar has lost value has nothing to do with Trump says. More and more people are thinking now that the United States will get into trouble because of the coronavirus. The recent sharp rise in gold prices seems to confirm my opinions. This rare inter-meeting move by the Fed before its FOMC meeting on March 18 makes a lot of economists wonder, including me, whether there are any potential major threats that we don’t know about. Sceptics are already spreading rumours that the US Government shared with the Fed some top secret details about the coronavirus.

“Fed Chair voices concerns…”

Most parts of the Fed Chair’s statement involved coronavirus and his belief that rate cuts will definitely not help solve everything. US stock markets slipped as the Chair kept voicing concerns.

I dı believe that Fed’s inter-meeting rate cut move may encourage Turkish Central Bank to cut rates again. Although the latest inflation data turned out to be lower than expected in Turkey, the fact that annual inflation remained above 12% has quite damaged the “single-digit” inflation expectation. If the Fed didn’t cut rates by 50 basis points, a strong public support could have been gathered until the March 19 meeting to prevent the central bank from lowering rates. But now, having mustered its courage, CBRT seems quite likely to go for a rate cut.

By the way, the fact that there is a trend of growing disparity between the figures released by Istanbul Chamber of Commerce and CPI data doesn’t escape my attention either. Such huge gap between the “perceived” inflation and the “actualized” inflation may create problems for both Istanbul Chamber of Commerce and TurkStat in terms of damaging their institutional reputation and people’s confidence.