Fed's interest calculation has reversed: Markets are eyeing the decision to be announced

After the Fed increased the policy rate by 25 basis points to the range of 3.75-4.00 percent at its September 15-16 meeting, the expectation of a new interest rate increase in October became stronger in the markets.

However, the situation has changed in recent days.

Messages from New York Fed President John Williams, stating that there is no need to act urgently for a new interest rate increase, significantly reduced the expectations for the October meeting. According to Reuters, the probability that the markets give to the possibility of an interest rate increase in October has decreased to 20-25 percent, while the increase expectation for the December meeting is approximately 85 percent.

BOND MARKET TIGHTENED INSTEAD OF FED

One of the important reasons for the change in expectations was the sharp movement in the US bond market.

The rise in long-term Treasury bond yields tightens financial conditions by increasing borrowing costs for companies and households.

This situation causes a similar tightening effect in the economy without the Fed making a new interest rate increase.

While the 30-year Treasury bond yield in the US exceeded 5.70 percent on October 7, reaching its highest level in 24 years, high energy prices and increasing public debt increased the pressure on the bond market.

DIFFERENCE OF OPINION AMONG FED OFFICIALS

Within the Fed, there are different views on the next direction of monetary policy.

While Williams takes a more cautious approach, some Fed officials argue that new interest rate increases may be necessary if inflation pressure continues.

While Kansas City Fed President Jeff Schmid expressed the opinion that further interest rate increases are needed, San Francisco Fed President Mary Daly stated that whether new increases are required depends on whether the shocks that increase inflation are temporary or permanent.

DECEMBER FEATURES INSTEAD OF OCTOBER

Recently announced weaker employment and inflation data that remained below expectations also reduced the possibility of a new interest rate increase in October.

The October interest rate increase expectation, which rose to 69 percent at the beginning of September, dropped to 20 percent following the weakening employment outlook and cautious messages from the Fed.

On the other hand, markets maintain the view that the Fed may raise interest rates once again before the end of the year.

According to current pricing, keeping interest rates constant at the October meeting and bringing a new interest rate increase to the agenda in December stands out as a stronger scenario.

FED MINUTES WILL BE MONITORED CLOSELY

Investors' focus is now on the minutes of the Fed's September meeting.

The minutes are expected to more clearly reveal the discussions behind the interest rate hike decision and the disagreements of Fed members regarding the rest of the year.

Employment, inflation and bond yields are expected to be decisive in the Fed's next steps.