Week of 3/17: The Fed Holds Steady, Japan Increases For the First Time in 17 Years, and Turkey rises to 50%

Welcome to "Worldview: Central Bank Insights" – your shortcut to understanding recent trends in global finance.

In this thirteenth episode, we delve into how Fed officials kept the interest rate at 5.3 percent and project three cuts this year, then to Japan pushing their interest rates above zero for the first time in 17 Years, and lastly how Turkey raised their interest rate to 50.

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Email: rabossong2@gmail.com

Transcript

Hello and welcome to the thirteenth episode of "Worldview: Central Bank Insights”. I am your host, Reagan Bossong, a freshman at the Wharton School of Finance, and it is my pleasure to guide you through another exploration of the largest stories regarding global financial dynamics over the past week. We will begin with an overview of general news from the US Fed, and then delve into a few stories about other central banks around the world. In today's discourse, we will begin by discussing how Fed officials kept the interest rate at 5.3 percent, then Japan pushing their interest rates above zero for the first time in 17 Years, and Turkey raising their interest rate to 50.

The Federal Reserve has decided to keep interest rates steady at 5.3 percent and projected that borrowing costs will decrease somewhat by the end of 2024 as inflation eases. This decision comes as the Fed chair, Jerome H. Powell, maintains a cautious stance, emphasizing the need for careful easing to prevent a resurgence of inflation.The Fed's policymakers have been grappling with rapid inflation for two years, and while recent progress has been encouraging, they remain vigilant. The decision to maintain rates at a high level, which has been in place since July, is expected to weigh on growth and inflation. However, the Fed has signaled that rate cuts are likely in the coming months.The Fed's latest economic estimates project that borrowing costs will end 2024 at 4.6 percent, indicating three quarter-point rate cuts this year. Powell emphasized that the Fed's aim is to guide the economy toward a soft landing, where inflation cools without causing a sharp economic slowdown.While the Fed has not yet begun to lower rates, Powell avoided giving any indication of when rate cuts might start, keeping the Fed's options open. The timing of rate cuts could become politically sensitive, particularly as the November election approaches.The Fed's decision to hold rates steady reflects its cautious approach to managing inflation and economic growth. The Fed will continue to monitor economic conditions closely and adjust its policies accordingly to achieve its dual mandate of price stability and maximum employment.

Japan's central bank has raised interest rates for the first time since 2007, marking a significant shift in its monetary policy. The move comes as Japan's economy shows signs of stronger growth, with inflation and wages rising, suggesting that the economy can grow without the need for aggressive stimulus measures.The Bank of Japan had previously adopted negative interest rates in 2016, a step taken to stimulate borrowing and lending and spur economic growth. Negative interest rates meant that depositors paid to leave their money with banks, while borrowers could take out loans at very cheap rates.However, recent developments in Japan's economy, including higher inflation and wage increases, have prompted the central bank to raise interest rates above zero. The bank's target policy rate was raised to a range of zero to 0.1 percent from minus 0.1 percent.The bank stated that the economy is in a "virtuous cycle" between wages and prices, indicating that wages are rising enough to cover increasing prices but not to the extent that it cuts into business profits. The main inflation reading in Japan was 2.2 percent in January, the most recent data available.The move away from negative interest rates is viewed as another important step in Japan's economic turnaround. It is seen as a sign that the country's economy is on a course for more sustained growth after years of stagnation.While the rate hike could strengthen Japan's currency over time, the central bank's governor, Kazuo Ueda, emphasized that the bank would maintain a largely accommodative policy, meaning it won't squeeze the economy too hard. The bank will continue to monitor the economy closely before making further policy changes.The rise in wages and inflation signals that the economy is strong enough to generate inflation and withstand higher interest rates. The Bank of Japan aims for annual inflation of 2 percent, a target that has been at or above that level for nearly two years.Overall, the rate hike marks a significant milestone in Japan's efforts to normalize its monetary policy and stimulate sustained economic growth.

Turkey's central bank has raised its key interest rate from 45% to 50% in an effort to counter climbing inflation, despite previous hints that its rate-hiking cycle was ending. The move comes as Turkish annual consumer price inflation soared to 67% in February, raising concerns about the need for further tightening.The central bank's Monetary Policy Committee cited a higher-than-expected underlying trend in monthly inflation, along with persistent inflation pressures from services, food prices, and geopolitical risks. The committee emphasized the need to maintain a tight monetary stance until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range.The rate hike was a surprise move, as expectations were skewed towards a rate hold ahead of local elections in Turkey. The decision to raise rates by 500 basis points to 50% demonstrates the central bank's commitment to tackling inflation and should reassure investors of its independence. Turkey's lira was trading near its record low against the dollar following the announcement, reflecting ongoing pressures on the currency. The lira has lost significant value against the dollar over the past year, driven by declining foreign reserves and a history of unorthodox monetary policy.While the rate hikes implemented since May 2023 have helped stabilize the currency and address some imbalances, Turkey's economy still faces challenges. Inflation remains high, and foreign capital inflows are losing momentum, highlighting the need for continued vigilance by policymakers.

So yeah, in conclusion, we began by discussing how Fed officials kept the interest rate at 5.3 percent and project three cuts this year, then to Japan pushing their interest rates above zero for the first time in 17 Years, and last how Turkey raised their interest rate to 50. As we continue to live throughout this financial landscape, the ripples of change will definitely continue being felt across economies worldwide. That’s a wrap for this week's central bank roundup. If you have topics you want me to dive into or thoughts on today's podcast, let me know anytime. You'll find all my contact details in the show notes. Until next time. Thank you!