Global rate hike is unavoidable in face of FED’s positioning

Global rate hike is unavoidable in face of FED’s positioning

The U.S. Federal Reserve’s (FED) rate decisions arouse much more interest in markets than national decisions.

The details of the FED’s minutes will be read thoroughly by the market players today and what these details mean will also be discussed.

Most probably due to their positioning some bankers will say the minutes are positive while some others will say they are negative, both trying to influence the public opinion.

Whatever is written on the minutes I think the tendency is clear: The FED will now begin slowing its asset purchases.

What will be discussed is whether this tapering is to start in September or in the following months and what will be the amount.

No one has any doubt that the FED will slow its asset purchasing program.

When it comes to what that means: It is believed that the U.S. economy has started to recover and that’s why the additional high liquidity that has been poured into the global markets will be withdrawn phase by phase. And the FED will start this operation by decreasing the amount of the bonds it had bought to support the markets. Most probably the FED will zero its asset purchasing by the beginning of 2014, then beginning the sterilization process.

The rates of the treasury bonds, especially of the 10-year U.S. bonds, therefore, have started to increase rapidly.

This means that it is time to take measures against inflation since inflation has started to increase due to the economic recovery. What this means for the world, for the global economy, is the ending of high liquidity which was made available to get developed countries out of the crisis.

In this manner, the emerging markets will need to say goodbye to their high liquidity party days. The rates in the emerging markets therefore will be unavoidably hiked as these markets want to maintain their growth rates and they could do this by attracting short-term foreign capital. This appears to be inevitable…

Turkey in negative situation

It has been inevitable for the emerging countries which have a structural current account deficit, in need for huge amounts of foreign capital to grow to be affected most negatively from the latest period. In other words, Turkey will see much worse days than the other emerging markets will see.

Turkey has recently faced the financial deteriorations much above the emerging markets average amid the monetary tightening. This was mainly caused by Turkey’s chronic high current account deficit problem.

Furthermore, another crucially negative factor for Turkey is the latest decrease in the confidence towards the country’s economy administration. Foreign investors had believed that Turkey’s central bank would take the right decisions for years, partly due to the effect of the deputy prime minister Ali Babacan. The latest developments have however shown that politics stole a real march in economy, resulting in a definite decrease in the confidence to the central bank. Therefore many are now seriously suspicious about whether the central bank could take the right decisions when it is necessary. The more the investors lose their confidence in the central bank, the more (than expected) the Turkish economy will lose.