Policy Interest Rate, Again!

Inflation in the US turned out to be higher than expected, and worse, core inflation dropped to the lowest level in the last 40 years. Thus, the “don’t increase the interest rates” warning by some international institutions has never taken into consideration by the world countries.


I think that even the Fed members would demand a hike in interest rates until the inflation slows down, which makes an increase of 100 bps at the meeting in November a stronger possibility. After the announcement of the inflation figures, many institutions made a statement that the Fed would not hesitate to hike rates above 4%.


While the dollar is expected to grow stronger with the expectation of future interest rate hikes, there was also a high anticipation that stock markets would suffer a decline, which did not happen. It has been well understood that the Fed will not show any hesitation to bring inflation under control, but the possibility that the same determination could be shown by the ECB first caused a decrease in euro to dollar exchange rate and then a slight upward movement. The stock markets hesitated at first, but then continued to go up. While commodity markets followed a fluctuating trend, oil’s rise following the OPEC+ decision did not go unnoticed.


“Being A Regulatory Authority…”


Markets seem to have accepted this: “We may not have seen the worst, but now we know what the worst could be”. Recession is no longer an expectation but a reality. High interest rates are also accepted as an unavoidable reality in the medium term. In fact, uncertainty is the worst enemy of the markets. If there is clarity, even in the most feared situations, investors get used to the circumstances after a while.


The fluctuations end quickly, and the basic balances of the economy are not deeply damaged when regulatory authorities stick to the practices which effectiveness has been confirmed by past experience and try to keep the legislation intact as long as possible, without introducing surprising changes to laws and regulations, in order to continue to have the confidence of the markets. It is also important to show the determination to apply a model that will relieve stress and that will not be found odd by the markets.


Tough times are easier to overcome when regulators prove their strength to market actors by showing them that they know what they are doing rather than constantly changing rules. Of course, sometimes rules must be changed. In this case, the regulatory authority should decide the length of the adjustment period correctly.