From interest rate cuts to interest rate hikes...

Between war, inflation, and domestic political developments, we had started to lose sight of what was happening abroad. However, just as every issue has its effects, some developments abroad, policy changes, and steps taken also affect us and, in certain areas, cause us harm.

Of course, when it comes to economics, the foremost institution is the US Federal Reserve, the Fed. Because, despite comments that "it is losing its power," the US dollar is still the reserve currency, and its value is of close concern to the rest of the world, especially emerging economies like Türkiye. The value of the dollar, or the possibility of it strengthening cyclically, is even more critical for Türkiye—indeed, we could say it is a "risk factor." This is because one of the main pillars of the domestic disinflation program is keeping the TL real effectively strong. In other words, keeping the rate of increase in the exchange rate lower than inflation. This means establishing a balanced increase in the exchange rate, even though it is said that "there is no exchange rate targeting." In this regard, decisions and verbal guidance that cause the Dollar Index to rise can occasionally create challenging processes for Türkiye.

Given this state of affairs, we are inevitably forced to pay attention to what the Fed is doing and/or what it will do. We follow the Fed's decisions and try to understand its next step. The latest Fed meeting produced results that need to be analyzed in great detail. Let's first look at the decision, then I'll share the developments and expectations with you, and try to interpret the possible effects on Türkiye.

At its latest meeting, the Fed kept interest rates steady in the range of 3.5-3.75 percent. Thus, rates remained unchanged for the fifth consecutive meeting. Before the decision, Fed Governor Waller had stated that inflation was now the primary policy concern and that risks had "completely shifted" from the labor market to inflation control.

The decision to hold steady was made with a 9‑to‑3 vote. That is, 9 members voted for rates to remain unchanged, while 3 members wanted a 25‑basis‑point hike. This was the first meeting since September 2016 in which three policymakers dissented in the same direction (for a rate hike). We know that the last time such a development occurred, the Fed went for a rate hike two meetings later.

In light of these developments, the latest expectations indicate that the market is currently pricing in two 25‑basis‑point rate hikes within 2026. The Fed officials' year‑end interest rate projections are in the range of 3.6‑4.1 percent. That is, even among committee members, there is an expectation of at least one hike by the end of the year. The Fed's next policy decision will be announced on September 16. In this regard, Fed Chair Warsh's speech at the Jackson Hole meetings on August 27‑29 needs to be monitored. Nevertheless, the fact that the latest decision was taken with a 9‑to‑3 vote has already reinforced the perception that "the next move could be upward." In short, at the beginning of the year, the Fed was expected to cut rates, and now we have started discussing how many rate hikes it will implement.

So why does all this concern us? The reason is actually very simple. Türkiye is pursuing a policy of keeping the TL real effectively strong by suppressing the rate of exchange rate increase. To achieve this, it is making a serious effort, maintaining relatively high interest rates and occasionally using its reserves. It is also providing guidance that this policy will continue, in order to prevent rapid outflows from carry‑trade investors. Looking at the matter from this perspective, we can anticipate that a Fed rate hike would strengthen the Dollar Index, thereby increasing the effort Türkiye would need to exert. In other words, rates could remain higher for longer than expected! Of course, these are not my recommendations; they are my projections based on the written and verbal guidance provided by the Central Bank so far, as well as the steps it has taken.