FED laid down on the table the interest rate hike route…
US Federal Reserve has finally raised the interest rate
to 0.50 by increasing them by 25 basis point, the first time since 2006. FED
has cited the following reasons for the rate hike: a notable improvement in the
labor market and an assuring view regarding the reaching of the 2 percent in
the rise of the inflation. In the statement issued after the meeting, in fact a
road map for the interest rate hikes has been put forward. It has been
emphasized that the FED’s stance would be consistent with the economy’s pattern
and will be based again on data and this continuation of the interest rate hike
will be progressive.
The 10 out of 17 members of the FED’s Open Market Committee’s
decision making body see the interest rates as 1.40 at the end of 2016. If we
consider this emphasis on the gradual increase and that the FED will meet 8
times in 2016, it means that it will bring the interest rates to 1.50 percent by
the end of the year through 25 basis points increases.
Judging by the forecasts, within this outlook, the
interest rates will also continue to increase in 2017 too and will reach 2.75
percent at the end of the year with an additional 1.25 increase. But an
acceleration in the inflation may cause further increases while a deterioration
in the employment may cause a suspension in the increase of the interest rate.
By pointing out the improvement in the labor market, the
FED stated that the decline in oil process was effective to have the inflation
rate staying below 2 percent and after the passing of these impacts, it is
estimated that the inflation will be close to 2 percent at the end of 2016.
The FED is raising the interest rate gradually in order
to avoid having to make a sudden high increase in the future and if necessary
to be able to lower it again. Yellen says “the interest rate increase should be
seen as a sign of confidence”.
The FED drew his sword and laid down its route on the
table. On this route, it will slow down or accelerate in case of a different
situation that may arise in this route. Without any changes in the current
state, the FED will not stop in its interest rate increases.
As of today, the questions such as “will it raise the
interest rate?”, “when will it raise?” are replaced by the question “will the Fed’s
interest rate increase’s dose change?”. And this will be scrutinized deeply by
the high yield bond market and the emerging countries. Because the extreme
section of the capital markets which took advantage of the FED’s interest rate
cut and its monetary expansion performed in three phases were these high yield
bonds and bonds of emerging countries. Now that the FED is exiting this policy,
the first effects will be seen in these markets.
In this view, the emerging countries will be forced to
raise their interest rates in order to protect the interest rate difference in
terms of dollars as well as to keep the value of the domestic currency. The
most unprepared and which follows a loose monetary policy will be the one which
will be affected the most. The fingers point out the fragile quintet. And the formula
is quite simple: whoever stalls in the interest rate will see its national
currency lose substantial value.
