The anatomy of Fed decision and the illusions about inflation…

I can’t help but notice that the arguments set forth to defend the highly anticipated decisions are in fact based on the 20th century paradigms. I know I may sound rather assertive but I find the Fed Chair’s comments not very suitable to the world’s current economic conjuncture.

As a matter of fact, a 25 bps cut wasn’t surprising at all to any of us. Given the fact that the Fed hasn’t cut rates for three consecutive times since 1980, Chair Powell has also signalled that, from now on, he would monitor certain parameters very closely in order to finalize their next step until December, and the paramount of which is obviously inflation.

While in Turkey we are worried about high inflation rates, meanwhile American people are rather concerned about the fact that inflation rate does not go up. Actually, ‘fragile demand’ is the reason behind low inflation. Demand won’t increases as expected even though wages go up. Not to mention the fact that US retail companies are almost completely engaged in e-trade, which meaning they are selling their products online only, hence they keep their prices pretty flexible remains as an obstacle to the rise of inflation. Accordingly, I should say that the fact that Fed’s decision is solely inflation-based is open to disagreement, especially now with the introduction of new technologies.

“I wonder whether inflation rate is calculated correctly”

I also would like to point out the fact that today many services are provided for very reasonable prices or even free. The new generation is highly inclined to the ‘sharing economy’. They share almost everything, except of course their mobile phones. Some companies prefer renting goods or services rather than purchasing them. And the companies that offer renting services feel compelled to introduce a variety of financial and technological models in order to stay alive in the midst of this fierce price competition.

As people’s consumption habits and companies’ pricing behaviour slowly change, I think it may be very useful for the Fed or another central bank to reconsider their convictions on inflation. And the large gap between inflation and cost of living in Turkey similarly needs reconsideration and maybe a thorough analysis. There is a high risk that the future monetary policies may be barren of results because of inflation indexes that do not accurately reflect unconvincing or changing paradigms.

If people start to think that central banks, whose authorities are questioned all the time, make decisions based on inaccurate data which fail to reflect economic developments properly, we will get one step closer on the inevitable end.

Fed is set to release its statement on December 11, a day before the CBRT decision. We’ll have to wait and see what happens.