Almost everyone thought that the Fed would drastically change its monetary policy due to the growing possibility that the US economy might enter recession. Maybe the Fed officials wouldn’t issue a rate cut decision but they might have completely eliminate the likelihood of a “one-time rate hike until the end of the year”, which they did.
Although the majority of exports knew that the Fed would keep the rates intact this time but the real important thing was the wording and the tone of their message. The Fed had two options prior to the meeting:
- Fed would either say, “I foresee risks ahead which compels me to make changes to our monetary policy”, thus letting us to enjoy positive volatility for a couple of days but the assets would start a downward trend in the medium-term. Accounting for nearly a quarter of the world’s GDP and 33% of world’s imports, the fact that the there are risks to the US economic outlook wouldn’t be such good news for the markets indeed. Also considering that the US has 31% of total global debt, the likelihood of the world entering a new global financial crisis would drastically rise.
- Or the Fed could have made a statement like, “We consider it would be appropriate to take action today to eliminate future risks”. Such statement would not cause too much problem over the short and medium term but this time leading investors to read something different into the US economic figures every time they are released.
The Fed’s last decision, however, did establish a fine balance between the first and the second option. From this point of view, I can say that market is soon to go through a delicate period. It is now established that if Trump is re-elected, he will try to remove Powell as Fed chair. But, no matter who takes over as Fed Chair, s/he will not drift away from the logic of the market.
“Does low interest rate policy work?”
Meanwhile, Trump tweeted, “Mario Draghi just announced more stimuli could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA.”, calls European Central Bank President’s comments unfair to the United States before the Fed decision. Apparently, this statement didn’t have too much of an impact on Fed members.
But the truth is, when compared we compare the first 3 months of the last year with the same period this year, we can see that Chinese and the US exports made no progress while the EU and Japan seem to have declined significantly, which means low interest rate monetary policy comes to nothing. On the contrary, these countries have suffered big losses due to trade wars.
In conclusion, the fact that the Fed has taken a milder direction in its balance sheet reduction and interest rate policy compared to the past while developing countries like Turkey are going through hard times, economic stability-wise, can be considered a positive development. Nevertheless, I think we should focus on the medium-term risks without letting ourselves be fooled by the positive yet short-term trend.