Orhan Ozcan/TR724
Last week, the investment community followed the annual central bank conference in the United States, known as ‘Jackson Hole,’ and evaluated the outcomes of the conference. This year’s theme was “Reviewing Monetary Policy and Monetary Transmission Mechanisms.” In fact, recent events, particularly in the U.S. economy, have turned some classic economic theories upside down.
Despite recent interest rate hikes in the U.S. reaching the highest levels since the 1980s, the country hasn’t experienced high unemployment, low growth, or even a recession, as classic economic theories would predict. Interest rates have reached their highest levels in 40 years, but in the U.S. economy—whose gross domestic product (GDP) is $27 trillion, accounting for a quarter of the global economy—there hasn’t been high unemployment, low growth, or a recession. Recent developments in the U.S. have, in some ways, thrown classical economic theories, as taught in textbooks, into the trash. This is truly a success story.
You raise interest rates to a very high level (5.25% – 5.50%) to combat inflation, reduce inflation, but without harming the job market or growth. This is a significant feat of central banking and a success story that deserves applause.
All these developments also raise other questions. For example, is the long-term 2% target announced by the Federal Reserve (FED) truly a necessary goal? Perhaps, at this point, this target might not even be the right one. Pandemic practices, immigration policies, and the labor force created by them, as well as artificial intelligence technology, might have changed or started to change certain dynamics. It seems that all these developments indicate that nothing may ever be the same again.
The whole world is focused on the FED and is pricing in at least a 25-basis-point rate cut, perhaps even a 50-basis-point cut, at the September 18 meeting. Before September 18, the only important data point is the non-farm payroll data to be released in the U.S. at the beginning of September. After that data is released, it will become clearer whether there will be a 25-basis-point or a 50-basis-point hike.
In Turkey, the Burden Falls on Retirees and Wage Earners
While talking about the success story of the U.S. economy, we should also not overlook the failure story of Turkey’s economy. Turkey’s so-called battle against inflation (!) continues at full speed, but the bitter pill of inflation control is being forced only on retirees, minimum wage earners, and wage earners. Perhaps what needs to be done on the Central Bank side is being done within the limits of what is possible, but fiscal policy is a complete fiasco. In the fight against inflation, the most crucial factor in lowering inflation is anchoring the expectations of all economic actors, including their future inflation expectations.
If all economic actors believe that inflation will decrease due to the implemented policy measures, only then will there be a real reduction in inflation. If you can’t manage these expectations, you won’t be able to successfully lower inflation.
They are supposedly ‘fighting’ inflation!
While the Central Bank is trying to curb domestic demand and restrict credit supply by raising interest rates, on the other hand, if you impose around 40% hikes on basic energy inputs (electricity, natural gas), bridge tolls, etc., which directly affect inflation, how can you anchor inflation expectations?
It’s really like a joke, this so-called struggle. You announce a superficial savings package in the public sector, and right after that, the country’s president goes to the NATO summit in Washington with five planes, and everyone knows about it. After all these oddities, how will you convince everyone in the country that inflation will decrease in the future?
Only if everyone living in the country believes in the sincerity and determination of those governing the country to reduce inflation, will inflation actually fall. Leaving aside this so-called struggle based on unreal inflation figures and the illusion of inflation falling due to the base effect, do you see such sincerity and determination in those who actually govern the country and its economy?
