How will the actions of the US Federal Reserve affect the Israeli capital market?

The relatively high growth forecast of the Israeli economy and the expected low inflation compared to developed economies, may lead the domestic market to an excess return over other markets, similar to 2021

Daniel Georgi, Guest Column

30/01/2022

Sunday, 30 January 2022, 12:24 Updated: 12:40

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The year 2022 opened with a storm, with the world's major stock indices registering particularly sharp declines, after significant increases that characterized 2021. The main reason is the change in the US Federal Reserve's policy regarding examining the rise in interest rates in the world's largest economy.

This is in light of inflation of about 7% in 2021, the highest since the 1980s.

The central bank, which has tended to attribute to the recent signs of inflation bubbling as a temporary and transient event, has had to admit that it will not be in a hurry to disappear so quickly.

As a result of the insight and after a long period of lowering interest rates and buying bonds, the Fed is expected to move to a restrained policy of monetary tightening, raising interest rates and completely stopping the buying of bonds.

All this, to curb the inflation that has raised its head at an alarming rate.

With this move, the Fed is expected to join many countries in the world that have already started raising interest rates, such as the UK, South Korea, Norway, the Czech Republic, Hungary and more.

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Moves to a different policy.

Fed President Jerome Powell (Photo: GettyImages, Brendan Smialowski)

The recent rise in inflation is mainly explained by excess demand after a long period of restrictions and closures, alongside a shortage of supply of raw materials due mainly to substantial disruptions in supply chains.

Substantially rising fuel prices have added quite a few toothpicks to the fiery inflation fire.

The geopolitical tension between Russia and NATO on the Ukraine issue is another catalyst for the current wave of declines. The sharp declines in the markets are almost inevitable for any sector. Painted green while the rest of the sectors are painted bright red.

Good opening position

Daniel Georgi (Photo: PR)

Will the sharp declines continue to accompany us into 2022 or has a buying opportunity been created here in light of the massive wave of declines?

We will not be able to answer this question, but we can provide some macro data as released recently in a press release from the Bank of Israel's Research Division:

GDP in the State of Israel is expected to grow by 5.5% in 2022 and inflation is expected to rise by 1.6%.

The transfer of the state budget and the increase in tax revenues moderated the forecasts for the deficit and the debt-to-GDP ratio to a deficit of 3.6% of GDP and the expected debt was also updated downwards to 69%.

In addition, the Bank of Israel estimates that the interest rate will be 0.1% to 0.25% in a year.

The relatively high growth forecast of the Israeli economy and the expected low inflation compared to forecasts for developed economies, as shown by the Bank of Israel's macro forecasts, puts the Israeli economy and markets in Israel in a good opening position that may lead the domestic market to surplus over other markets.

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