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    The significance of being insignificant

    Fatih Özatay, PhD22 October 2013 - Okunma Sayısı: 1100

    The recent market relief is because the FED is not expected to change its monetary policy at least up until December.

    The Central Bank Monetary Policy Committee (CB-MPC) will convene on Wednesday and the Federal Reserve (FED) on 29-30 October. Just a month ago, Turkey was waiting with excitement for their decisions and the tone in their statements. There is no such interest today, however. Is it because of the long vacation Turkey took last week? Not really.

    The main reason for the lack of interest is the recent developments in the US, of course unless events move in the opposite direction in the week ahead. Remember the US government was shut down and a number of government employees were furloughed from their jobs after the Republican Party and the Democrat Party were unable to reach a deal. Moreover, no agreement was made on raising the debt ceiling of the US Treasury which had almost hit the limit.

    While the economy is turning around though slowly, the US had suffered similar tensions before, the latest being early this year. Such swings restrict the role of fiscal policy in bolstering economic growth. Besides, the deal the Republican and Democrat parties reached only hours before the ceiling would be hit saves the US time only until the first couple of weeks of 2014. In other words, it is quite likely that the same risk will unfold once again.

    This risk increases the probability of FED’s postponing of the long-feared policy reversal. Indeed, in last month’s meeting, the FED unexpectedly postponed tapering. And Obama’s nomination of Janet Yellen as new FED chair provided further relief to markets. The common view that Yellen is willing to continue with a loose monetary policy for some time more was the main reason for the market relief.

    Judging by these, the world is nearly unanimous that the FED will not take the feared steps in this month’s meeting. The next meeting is scheduled on 17-18 December. Currently the dominant view is that the FED will not decide for tapering in its December meeting. But this view does not have actual meaning for now since other data to be released until December, especially the unemployment data, also are of importance. If the downwards trend in unemployment continues and labor force participation rate increases or remains stable, the FED might decide for tapering in December. We will wait and see.

    Hence, the relative disinterest in the outcomes of the CB’s October meeting and the recent market relief are because the FED is not expected to change its monetary policy at least up until December. This is why the MPC meeting is not newsworthy for the markets currently. This is good news for the Central Bank given the months-long tension faced lately.

    This commentary was published in Radikal daily on 22.10.2013

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