Powell's Testimony

Chairman Jerome Powell made a statement on the monetary policies implemented by the Fed as the semi-annual report on the 7th and 8th of March before the American Senate of Banking committee and the Parliament. After Powell's first statement, American 2-10-year bond spreads reached its lowest point since 1981, and in fact, this negative yield curve is historically an indicator of recession.
In these sessions, members of senate questioned Chairman Powell whether the decisions made so far are right for the American people. Board member Brown, in his speech, states that interest rate hikes not bring large institutions order and the system does not come to order at desired points. Because of the interest rate hikes, companies continue to announce their best balance sheets in 2022, one after the other. At this point, what is questioned by the Senate is the acceptance of the fact that interest rate hikes continue to benefit companies, while the public is dragged into distress. But in this case, with the separation of powers, the Fed is not just any legal arm on corporate regulations.

For two days, Powell's most repeated sentence is on price stability, that is, they are determined to reduce inflation to 2%, but the problem is that this has not worked in terms of social benefit. It is unclear whether the next rate decision will be 25 or 50 basis points. Powell also did not give a directive answer for the ratio. Rate hikes will continue and the Fed's balance sheet will continue to be lowered. While the interest rate is expected to remain between 5-5.50%, this rate will be updated and raised to higher levels. It will take some time for these to take full effect. In real terms, interest rate hikes may be thought to reduce inflation by slowing down the economy, but interest increases also increase mortgage payments. It is an abnormal situation that the payments you need to make increase before the income you receive in the next month increases. Among those affected are young families who will buy their homes for the first time. The problems experienced on the mortgage side, on the other hand, also disrupt sectors such as transportation, transportation, and furniture.

Again, Powell says that unless they achieve full price stability, they will not be able to meet their 2% inflation target. At some point there will be unemployed people, there will be payment difficulties and there will be victims in the society. The questions asked by the Senate are that it is the people who will bear the burden of inflation, but that the companies will continue to increase their earnings. One of the questions that Warren, a member of the Senate, posed to Powell was whether a recession was avoided with the increasing unemployment rates after World War II, and the answer was "no". At this point, recession expectations have increased with data. Approximately 3.5 million American citizens need to be unemployed so that inflation can fall and price stability can be achieved. The second sentence, repeated by Powell, is "we will stay on course until the job is done".

It is shown that one of the main causes of inflation in both Europe and America is the negative impact of the war between Russia and Ukraine on food and energy prices. However, when we examine the American CPI, we can see that it increased independently of the situation starting from January 20, 2021, the day when American President Joe Biden took the office, and February 24, 2022, the beginning of the Russia-Ukraine War. In this case, the Biden administration is being questioned by members of the Senate. The credit card usage in the States is at its highest levels and it increased the indebtedness rate, and the possibility of individuals not meeting their debt obligations is also included in the equation.

So what happens when the inflation target is not met by the Fed? It becomes more difficult to stabilise capital allocation and price stability. While reaching a solution, the increase in interest rates and the unemployment spiral continues for a while. One of the issues on the agenda is the “Debt Ceiling”. This debt ceiling ratio is a process passed by the American Congress, not by the Fed. If approved, Washington continues to spend money, which will continue to increase inflation. When the limit is increased, more money will be printed to cover the problem, and when wages are increased with rising inflation, this increase will turn into hidden taxation by the government. For the next rate hike decisions, it is necessary to examine the data before the meeting in March. American stock markets will start the day negatively due to the crisis experienced by Silicon Valley Bank, and the non-farm employment data was announced with an increase of 311,000 and the unemployment rate from 3.4% to 3.6%. The increase in data in the process of reducing inflation is good in terms of mathematics, but it will cause problems in the employment of the people and price stability.

Ultimately, situations that are likely to develop in the United States may cause an upward movement in the USD/TRY parity, as both the interest rate hike and the balance sheet reduction process. At the same time, if the surplus in the balance sheet is diverted to this site as an investment, it seems likely that it will make upward movements in Turkish stocks.