The political economy of the Fed decision

Published 17.06.2017 00:43
Updated 17.06.2017 03:50

For approximately the last two weeks, we have been discussing the political economy of the Qatar blockade and analyzing the primary and secondary reasons for the Gulf crisis. In fact, we should apply the same methodology to all the events progressing one after another and to the decisions in other areas.

When we execute the same methodology and apply it to the decisions of the Federal Open Market Committee (FOMC) on June 13-14, the meaning of the interest rate hike, and the shrinkage of the U.S. Federal Reserve's balance sheet, the conclusion can be drawn that the cost of the dollar is increasing.

From Europe to Africa, from Asia to Latin America, now, we are entering a new period where debt in dollar terms will be expensive for companies and states. The second point is that, with this decision, the gradual rise of the dollar's value will cause downward pressure on oil and gold prices. This means that difficult days will linger for the Gulf countries and Russia.

It should therefore not come as a surprise that member and nonmember countries of the Organization of the Petroleum Exporting Countries (OPEC), prompted by Russia, have just extended their decision to reduce production for nine months. This is because if OPEC member and nonmember countries do not cut production while the Fed increases interest rates and downsizes its balance sheet, the barrel price of petroleum can fall to $40 and under, which will be very troubling for the economies of Russia and the Gulf countries.

It just so happens to be that the day the Fed decided on the interest rate hike, a decision was taken by U.S. Congress on sanctions towards Russia, and Qatar signed an agreement to buy $12 billion in warplanes from the U.S.

At this point, the Fed's balance sheet reduction step means a downsizing of $900 million from a balance sheet size of $4.5 billion, in one and a half years, up until the end of 2018. As this situation will increase the attraction of U.S. currency, "petro-dollars" piled up in the Gulf will return to the U.S. and the capital outflow from the economies of the leading developing countries will distress everyone.

Let's not ignore this point: President Donald Trump's foreign policy preferences bring up a series of worries with regards to the steps he aims to take towards the U.S. economy and public spending heavily focused on infrastructure. This is why it can be asserted that Fed officials have already taken precautions with their decisions to increase the interest rate and downsize the balance sheet as an advance control of an inflation risk in the medium term for the U.S. economy.

Having said that, it is a complicated issue and we must wait to see whether President Trump and his team will like the Fed's accelerating the tight monetary policy or not. The Fed's head, Janet Yellen, stated in a speech that she has not discussed with President Trump whether she will stay in office or not. Let's see how the investigation process stemming from Trump's conversation with other officials will shape itself.

Sustainable growth is the remedy

The 5 percent growth in the first quarter of the year is very important in a few aspects. Primarily, it is critical in the sense that it is the consequence of a nation that defeated treachery, terror attacks, and provocation on Turkey's unity and integrity, a "national will" that protected its country, and a struggle knitted closely to love of country.

Additionally, it is very valuable as an indicator of the resolution and struggle of the real sector that has experienced many economic and political crises, repaired the damages of these crises, learned from them, and said "there is no rest, continue on the road." The third point is that this 5 percent growth slapped the international institutions and their local supporters in the face. There were those who claimed that Turkey will kneel, tumble down, and will not be able to recover or register even a 2 percent growth rate in 2017.

Whether it is the Arab Spring, the Iraq or Syria chaos, or the Qatar blockade, the "growth" issue is again the reason behind the commotion in our region. The seven developed countries of the world are going through a very rough period in terms of growth. This mediocre growth issue is deepening the debt burden, the troubles in the financial system, and the political and social tensions, fueled by the increasing poverty and socioeconomic problems, of these countries.

One of the most important findings of the Justice and Development Party (AK Party) government during its 14-year rule, throughout which it strengthened economic awareness, is the fact that "growth is the panacea that cures all diseases." In this sense, growth means a rise in production, investment, employment, tax income, and life standards. When the economy slips away from its growth trend, when persistent growth disappears, production slows down, investments halt, unemployment rapidly increases, tax income decreases, and life standards deteriorate. A series of economic issues triggering each other quickly becomes threatening for the political stability.

This is why it would be beneficial that the economic administration focus on two critical points on the six-month action plan and its strategy plan towards 2018. The first includes the reforms and strategies necessary for long lasting growth; the latter point is comprised of the reforms and strategies towards decreasing manufacturing costs in Turkey for increased competitiveness. Persistent steps and consequences on fighting inflation and re-stabilizing the exchange rates will be of vital importance during this process. Unarguably, we can end this year with a growth close to 6 percent with measures to motivate private sector investments. This success will also carry the Borsa Istanbul 100 Index to 175,000 points.

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