Financial stability is more important that the interest rate level…

We felt relieved when we heard tensions caused by the Fed decision have finally been soothed, but now FX rates are soaring as we enter the final trading day of the week.

As expected, the Fed kept rates intact. Trump has tweeted “lower interest rates” as per usual before the Fed press conference. It was already apparent that Trump’s pressure would not bring any results especially when financial experts weren’t expecting any rate cuts. But the US President continues to his presidential campaign and is already arming himself with the “Don’t say I didn’t tell you so!” argument.

As you may remember, the Fed slashed rates three times in 2019 and in July cut policy rate by 25 bps, to a level of 2,00-2,25%, in September, again with a reduction by 25 bps, it pushed policy rates to 1,75-2,00%, and in October, to 1,50-1,75%. In December, the Fed made the US President angry by deciding to leave rates unchanged. But, no matter how much Trump gets angry, it seems like Fed members are determined to maintain a stable rate level, for now. Apparently, the next US recession isn’t coming. Accordingly, all parameters show that the US economy is improving and it continues to maintain its title as one of the world’s largest economies with is major share of total world imports (15%) and its GDP which represents 24% of total global GDP. In such case, I think we should not keep our expectations high about a possible cut rate.

The Euro/Dollar parity’s attempt to drop below 1.10 right after the Fed decision did not go unnoticed either. In Turkey, USD/TRY too has suddenly bounced following the press conference.

“Waiting for Turkey’s credit rating….”

I think at this stage it’s more important to achieve and maintain financial stability rather than having interest rates cut, bot for the US and Turkish economy. I do believe that the sooner the US achieves financial stability, the better Turkey’s economic parameters will become, of course, as long as nothing happens in Turkey that is disruptive to stability.

The fact that Powell said, “Repo operations will continue through April. It is our intention to return reserve to an ample level. We expect that to happen during the second quarter. We believe we can also gradually reduce repo as we reach an ample level” during a press conference shows that the Fed is concentrating on financial stability rather than interest rates, which is good news for Turkey.

On the other hand, we are waiting for Turkey’s credit rating to be released by S&P today. My guess is that they will warn of Turkey’s public finance and its susceptibility to external risks, but I do not expect a rating downgrade. I think it might be more reasonable for the S&P to upgrade Turkey’s credit rating when considering the current circumstances.