The Federal Reserve (FED) have declared the new interest rate of November after a two-day-long meeting and as one of the ruling powers of today’s world, the decision is expected to have a great impact on every market. Türkiye is one of the heavily affected countries as the interest rates is announced by the Central Bank of the Republic of Türkiye recently.
Interest rates have always been one of the biggest and strongest tools the FED is using for influencing the general economic state of first the United States, then the whole world, as many countries follow a similar path as FED. Lowering the interest rate may stimulate economic activity, increasing the amount of money used in the market through investments. On the other hand, a rise in the interest rates is used to slow economic activity, to get the money into the banks’ vaults, which is a common strategy when it comes to coping with high inflation rates. A great example for this strategy is Türkiye, with the high rates of inflation the interest rate is currently 50%, and it is hoped to contribute to the fight with the high inflation, through the encouragement of the citizens to invest in interest accounts.
After the two-day-long meeting of the Federal Open Market Committee, on November 7, the Central Bank announced that they cut the federal funds rate by 25 basis points, decreasing it from 4.75% to 4.5%, which is the lowest level reached since March 2023.
The decision of the committee was made unanimously, since the officials are starting to see the issue of unemployment as great as they see inflation. They are focusing on increasing the employment rate while also stabilizing and hopefully lowering the inflation rate. The officials also added that the economy is continuing to expand at a solid pace.
As the elections came to an end, and the fact that Donald J. Trump became the new president of the United States, economists were expecting the impacts of the new ideologies and policies on FED’s interest rate decision. Even though this month’s declaration was not heavily affected by the election, many believe that there is now a greater rate of variability moving forward, in the sense of pace and magnitude.
JPMorgan Chase’s chief US economist Michael Feroli wrote that the expectations are towards the idea that the FED will move more slowly than it normally would due to the policy uncertainties, also adding the prediction of one rate cut per quarter each year until reaching the levels of 3.5%. Other reliable senior economists are more or less on the same page with this thought, believing that the FED will make decisions more cautiously as the changes in the economic policies, taxation occur and would try to adapt to the new circumstances. Another expectation towards the following declarations came from Wall Street, as they assigned a 65% probability of another 25-base-point cut in December.
The stock markets were impacted positively from this move as well. As an illustration, both NASDAQ, whose companies are in the field of technology, and S&P 500 closed at record highs.
Usually, the Central Bank of Türkiye determines the interest rate according to the declarations of the Federal Reserve and they did so once again. The Turkish Central Bank stated that the decisive stance in the monetary policies will reduce the trend of inflation as well as strengthen the disinflation process through the balance of the domestic demand. Some economists said that the November decision of the central bank will be the first decision in a while that suggests a decrease from the 50% level.
However, unexpectedly, the interest rate remained unchanged at 50%. It is the eighth consecutive month that the rate is held constant at this level; it is at the highest point that it has ever been in since the year of 2002. Despite being held constant, the Central Bank pointed out the improvements in the inflation trends in the last months.
With these positive statements made, analysts are continuing to expect a lowering in the rates in December; so it is possible to say that what did not happen in November is expected once again in December. Nevertheless, it is not possible to say that the battling with inflation issue is fully resolved for the Republic of Türkiye. With the new measures taken in the future, hopefully, we will experience lower levels of inflation and generally a decreased level of fluctuation in the value of our currency, the Turkish Lira.
Measures are continuing to be taken to cope with the increasing levels of inflation in Türkiye, and the interest rate is impacted directly. Despite all the expectations of a decrease in the rates, in this dynamic economy of Türkiye, everything can change in a day.
Edited by: Ömer Gökce, Yağmur Ece Nisanoğlu