The Fed slams the brakes...

We saw the decisions of the last Fed meeting of the year, which we have been waiting for for a while, on Wednesday evening. In fact, the decisions and explanations were as we expected. However, the markets did not like the decision and local currencies suffered losses against the Dollar.

At the last meeting of the U.S. Federal Reserve in 2022, interest rates were increased by 50 basis points. With the last rate hike decision, the policy rate was increased to the range of 4.25%-4.5%. In the last 4 meetings before that, 75 basis point rate hikes were made. Therefore, we describe the 50 basis point rate hike at this meeting as a “slowdown”. But even the Fed's slowdown was enough to push interest rates to the highest level since 2007.

Another important data we expected to see at this meeting was the dot chart showing the expectations of Fed members for the next period. Because, Fed Chairman Powell had made an assessment in the previous meeting that the final interest rates should be increased to a higher rate than the previous estimates. In other words, the Fed will continue to increase interest rates more slowly than before, but by raising the interest ceiling higher.

Along with this meeting, we also saw the forecasts for some economic data of the USA. According to the latest estimates, the US inflation forecast for the end of 2022 was revised from 5.4% to 5.6%. Meanwhile, the unemployment forecast fell from 3.8% to 3.7%. The growth expectation for 2022 increased from 0.2% to 0.5%. Although it is predicted that unemployment will decrease and the economy will grow a little more, these positive data are actually negative for the Fed's plans. Because Fed Chairman Powell says that it is not very possible to reach the inflation target of 2% before the economy shrinks and unemployment increases.

The Fed will likely continue to raise interest rates at its February and March meetings. However, when asked about the rate of these increases, Powell replied, "it's not clear, we'll look at the data". Meanwhile, Powell made it clear that they were determined not to go for an early policy easing. There is another sentence that is overlooked but one that is very important: "So I can't tell you confidently that we won't move up our estimate of the peak rate, again, at the next SEP," and thus disturbing the markets.

Although the steps taken and the decisions taken are shaped within the framework of market expectations, I think that the reason why the markets are uneasy is Powell's above sentence.