The Head of the US Federal Reserve, Jerome Powell, during a speech in Jackson Hole at the annual economic symposium of the Federal Reserve Bank of Kansas City, confirmed the hawkish course of the American regulator to curb rapidly rising inflation. Mr. Powell assured that the US Central Bank will continue to raise interest rates to stabilize prices, which may cause an increase in unemployment and a decline in business activity. According to the Head of the US Federal Reserve, bringing inflation under control may take a long time.
The annual inflation in the US remains high. Thus, the Consumer Price Index in July of this year amounted to 8.5% compared to a year earlier. In terms of inflation components, food prices for American consumers increased by 10.9% YoY in July. However, the monthly increase in inflation is slowing down, which may indicate that the aggressive monetary policy of the US Federal Reserve is stabilizing the situation with rising prices in the US market. A month earlier, prices in the country increased by 9.1% YoY, and that was the historical maximum for more than 40 years.
According to market participants, the key rate of the US regulator will rise to 3.75-4.0% by 2023, and this will be enough to beat inflation and avoid a severe recession.
Thus, we expect the dollar to continue to strengthen, and an increase in pressure on the currencies of developing countries. Confirmation of significant monetary tightening plans leads to a revision of the risk-free rate of return and an additional risk premium in the framework of forecasting economic processes and individual projects. At the same time, an increase in interest rates will lead to an outflow of capital from developing countries and a flow of investments into risk-free investment instruments in the United States.
Also, the US Federal Reserve has once again confirmed for economists, the public and other regulators that the fight against inflation is a higher priority, and rates should be raised before the first signs of a decline in inflation. Hypotheses about the temporary nature of inflation, its permissibility for the economy and normal development are in the past. However, given the quite weak data on economic development, such aggressive hawkish rhetoric may lead to a sharp decline in the stock market, and this may cause a deeper recessionary phenomena.
In mid-June, against the backdrop of the US Federal Reserve’s hawkish monetary policy and relentless inflation, economists raised the probability of a recession in the US economy to 44% in the next 12 months.
Impact on Kazakhstan
The described situation primarily affects the tenge weakening, as the dollar and the return on investment in the US currency are growing. Given the high tenge inflation and the relatively low yield premium on tenge-denominated assets, such an increase in yield rates on assets denominated in US dollars will lead to an additional increase in the risk premium of market rates and a decrease in the assessment of the project investment attractiveness focused on obtaining tenge income.