Fed and ECB will continue to tighten the belt

A central bank's main task is to ensure price stability. The methods used are fiscal and monetary policies. We had a lot of money/savings that went unspent during the pandemic, and by spending that money we faced high inflation in the global economy. One of the reasons for high inflation was that the Russia-Ukraine war negatively affected oil and food prices. There is no prediction of when the war will end. The US, which is the strongest economy in the world, has seen a decrease in inflation levels since the interest rate hikes. In the latest FOMC meeting minutes published, we saw in the notes that some of the committee members voted to increase the interest rate by 0.25 and some of the committee members voted to increase it by 0.50 basis points, but they reached the 0.25 decision with a majority of the votes.

However, although the expected inflation data on February 14, 2023 was 6.2%, it was announced as 6.4%. The desired and expected positive atmosphere led to uncertainty for the next decisions. The decision of 0.25 basis points can be questioned at the next meeting. The Fed's goal is to reduce inflation to 2% by 2025. The decision of 0.25 seems correct in the long run, but there is still a risk of increasing inflation. The reason for this is the humanitarian and economic difficulties brought by the Russia-Ukraine War, as stated before. This is hardly possible to ignore.

Meanwhile, the US yield curves being at the level of -0.78% as of February 24, 2023 and falling to negative continue to generate recession signals. The labor market is very strong and it increases the risk of price increases. For this reason, it is difficult to control inflation. The PMI data, which will be announced in the USA on Wednesday, March 1, will be in our follow-up.

If we look at the data from the European side, according to the speech of ECB President Christine Lagarde in Strasbourg on February 15, 2023, we can say that in their next meeting to be held in March, they will decide to increase interest rates by 0.50 basis points. The balance sheet reduction will continue until June 2023, at a rate of 15bn euros per month. As Lagarde repeated in her speech, she will not change his stance until she brings inflation to 2%.