Fed decisions and risks ahead-2

I focused on the Fed decision and its reflections in yesterday’s report. Today, I’m going to talk about the messages given by the Fed Chair Powell at the press conference.

Pointing out the fact that financial institutions tighten the rules on lending loans and providing funds is causing the economic growth to further slowdown not only in the US but also all over the world; Powell implied that the Fed will not rush to hike the rate. Consequently at the press conference, we witnessed the Fed to revise both GDP growth and policy interest rates forecast backwards until. 2021

Apart from that, stating that inflation rate doesn’t show a trend as expected, Fed Chair has also given the message that they will not rush to reduce their balance sheet either. “Federal Reserve’s balance sheet reduction will slow in May” Powell said, adding that the Central Banks have now less room to intervene in downside risks.

“Parity is likely to go back to normal again…”

But, what did Powell mean by that? Let me clarify. He meant that if the Fed delays interest rate hike, it may not find the chance to lower rates again in case of a possible recession or financial crisis. The central banks of the developed countries, the ECB in particular, have already fallen in this trap, which is called “liquidity trap” in economic terminology.

No matter how much the Central Banks increase the money supply, it may not be possible to lower rates any further and the money supplied to the market may face becoming idle. Furthermore, it may not be possible to persuade people to invest or spend their money when concerns about the future are increasing, even if you make interest rates negative. If you add a huge debt stock on the top this already complicated situation, you might just get lost.

Obviously, Fed’s decision has a swift effect on the parity, kicking off the Euro’s rise against the dollar. But I don’t think that dollar’s depreciation against euro will last too long as the EU has many other problems to tackle with, especially Brexit.

Financial institutions in Turkey have finally breathed a sigh of relief but the fact that Fed forecasts for US economy and the world economy did become more negative compared to the past is not good news. We are entering an era where the supply of funds will become more and more important than the cost of funds.