FED minutes and beyond

With the relieve in markets after the crisis in relations with the U.S. was resolved, we have witnessed a significant appreciation of Turkish Lira within the last week. On the other hand, in the global markets we saw a rise in the dollar index. The FED minutes released is seen as one of the causes of this rise. After the September meeting known for the raise in its interest rates by a quarter, the minutes which reveal the details of that meeting was reread in order to form some idea about what will happen in the coming term. In this context, it would be good to summarize the main idea inferred from the FED minutes.

First of all, if we are to describe the condition of the economic activity, the members of the Federal Open Market Committee (FOMC) reasserted their messages of build-up which we have become accustomed to. The committee came to an agreement that the labor market in the U.S. is building up and that economic activity has increased significantly. In this direction, the FOMC which raised the outlook for real growth, raised the pace in the median to 3,1 percent. Unemployment rose by one percent to 3,7 percent, and the forecast for year-end inflation remained the same. There is also no significant change in middle-term outlook.

Of course, the minutes don’t ignore the existence of some risks regarding the economic outlook. Among them the kindly articulated uncertainty caused by the “developments in trade policy” is especially pointed out. In terms of the evaluation of the dollar, both local and foreign activities are recorded. Together with this, there is an agreement on the stable outlook of the risks… Thus, the meaning of the meetings, which decided that matters are going in line with the targets, is that rates will be raised gradually. In one word, these are “hawk” minutes.

This hawk-like attitude still has an impact on the markets as a development which directly concerns them. Besides the expected continuation of interest raises, FED’s balance sheet constraint process under the umbrella of normalization of monetary policy is another factor that needs to be taken into account. As it is known, FED, which has inflated its balance sheet from $900 billion to $4,5 trillion in just 10 years, is now following a policy of lowering it step by step. In other words, FED is withdrawing from its buyer position in the market. This withdrawal is emphasizing the tightening even more.

In this big picture, bond yields in the U.S. over the recent weeks are drawing attention. The significant rise in the yields (although it rises and falls) needs to be analyzed together with the increasing balance sheet constraints. Moreover, these developments occurring in an environment where the increasing debt is being discussed in DC is creating much more curiosity. Hence, the course of events concern not just the U.S. economy but the entire world.


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