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    The abnormality of the normalization process

    Fatih Özatay, PhD19 September 2013 - Okunma Sayısı: 1238

    So, if the FED announces the anticipated steps, will that be the end of the story? Not even close, unfortunately. Two main matters of debate concerning FED are ahead of us

    Can normalization be abnormal? We nowadays realize that it can. For weeks now we are obsessed with the steps the Federal Reserve (FED) is expected to take. These are considered steps for normalization in line with the FED’s discourse. Yet, the normalization process, at least a large part of it, will be a first for all of us. Hence it is abnormal and although it is not much voiced, the world is afraid that the abnormality will bring brand new troubles.

    Apart from the abnormality, there is an increasingly bugging detail: everyone is making guesses about when the FED will initiate the tapering and what the magnitude will be. Honestly I feel like the process should start immediately so that we can move on. The FED will have announced its decision before this commentary is published. So, you will know about them while you are reading this piece.

    FED’s decision is important for indicators that demonstrate rapid changes such as exchange rate, interest rate and stock prices, as evident from recent developments. However, when you move towards the universe of long-term relations – like the universe of economic growth, for instance – the picture story becomes for interesting for us: whether or not FED will take the expected steps immediately in its next meeting is of no importance for Turkey’s medium-term growth prospects. The FED will eventually introduce those steps, in its next meeting if not in today’s meeting. This was declared far earlier, there is no escape. It is certain that, the initiation of the process will affect Turkey’s growth negatively since foreign finance will not be as abundant as it used to be and interest rates will float around higher levels. This is a fact and the timing of FED’s decision does not change it. There inevitably be repercussions unless by some miracle the FED decides that it no longer wants to give more harm to developing countries and gives up the plan.”

    What has pushed the world economy into turbulence and caused exchange and interest rate hikes was the FED’s statement from May 2012. With reference to the program announced in 2011, the FED announced the tapering of the $85 billion injected to the markets on a monthly basis in the context of the third quantitative easing scheme. It also declared that the tapering will end by the end of the summer 2014. The common view before the meeting was that the tapering process will be started right after the meeting at a small amount around $10-15 billion.

    If this proves correct, we should not expect any exchange and interest rate response sharper than we have already witnessed. The relative relief across financial markets observed recently might halt, and that’s it. Any decision beyond anticipations will definitely get a response. A decision to postpone the tapering, for instance, would add to the relief. On the contrary, the amount of tapering exceeding $10 billion would disturb the mood, pushing exchange and interest rates up.

    So, if the FED announces the anticipated steps, will that be the end of the story? Not even close, unfortunately. Two main matters of debate concerning FED are ahead of us. First is about when the third quantitative easing will eventually end. Currently we know that it will be in the summer of 2014, but we do not know which month. The second one is about the federal bond rate. The FED is expected to raise its policy rate starting in the early 2015. The tension concerning the uncertainties thereby will most likely become visible within a year.

    This commentary was published in Radikal daily on 19.09.2013