Markets were relatively calm as Fed decision nears.
A small tip I’ve always emphasized: When exchange rates climb sharply, they usually tend to drop after a while. But, when gradual hikes come into the picture, concerns rise as people start to ask, “Will they go up any higher?”
In a foreign-dependent country in terms of production, savings and technology, exchange rates will always seem like a bigger problem than interest rates. I’ve already explained in details the reasons for this very phenomenon in my earlier reports.
To tell you the truth, those, who think dollar’s global appreciation will become a stable thing after the Fed decision, are mistaken; because, investors’ risk appetite must end first in order for dollar can gain in value. If everyone starts to sell their assets to buy dollar, then things might get massively worse. Although, according to some investors, rate hikes will be replaced by rate cuts, I don’t think Fed will take things too far.
“High expectations lead to sharp fluctuations….”
Although investors seem upset by ever-increasing stock markets and constantly appreciating assets, thankfully, occasional harsh sales bring balance to markets. Therefore, even if a problem arises, it would not arise from market dynamics, but from decisions made by leaders. For instance, Trump’s protectionist stance will potentially make a larger impact than Fed’s steps towards rate hikes.
Now, about the Fed decision… The first impact of policy rate hike on markets is a big nothing. Euro/Dollar parity went up whereas it should have been gone down. Dollar/TL also dropped while Stock Markets didn’t plunge too deep as expected, which all goes to show that expectations are too high, recklessly wasting time of markets.
Here’s what we understand from Fed Chair Powell’s latest statement: Gradual hikes will continue, with at least two more increases. Fed seems to take the inflation target very seriously, but this doesn’t mean they will wait long to make the next hike.
In conclusion, it looks like we will have to accept the fact that we can’t escape the high growth-high inflation-high interest rate reality in a world where the cost of funding will gradually increase.