'Fed' up with Turkish monetary policy

Many Turkey analysts and economists interpreted the U.S. central bank Federal Reserve?s (Fed?s) decision to keep its policy rate on hold on Sept. 17 as something positive for the Turkish economy and assets.

Their argument makes sense at first glance: Capital flows to emerging markets (EMs) would slow down considerably, if not come to a full stop or be reversed, once the Fed started raising rates. Countries like Turkey, which rely heavily on such flows and are deemed economically vulnerable, would be hit the hardest.

This line of reasoning seems to have been verified by data as well: According to statistics from the Institute of International Finance, an international industry association of financial institutions, there have been strong portfolio inflows into EMs since the Fed decision, reversing five straight weeks of outflows.

However, another strand of thought argues that the outflows were not because of the imminent rate hike but the uncertainty surrounding its timing and extent, and not only the first increase, but the whole hiking cycle. Since that ambiguity has only temporarily dissipated, the recent flows could be nothing more than the result of a respite.

There may be something to this view: Turkish assets rallied on Friday, but not in response to the Fed?s inaction, but upon learning that former economy tsar Ali Babacan was running in the upcoming elections. In any case, the Fed may have damaged the Turkish economy more by keeping the Central Bank of Turkey on hold than uncertainty in place. The Bank had already signaled that it would follow the Fed?s lead. Therefore, it was no surprise that no rates were changed at its own rate-setting meeting on Sept. 22.

The one-pager accompanying the decision was...