As expected, the Fed slowed the pace of its hiking cycle, with a 50bps increase. However, the broader signals were hawkish, with the dots showing a more restrictive path of policy through the forecast horizon. We continue to expect a further 50bps hike next year, before a cutting cycle commences by the end of 2023.
  • The Federal Reserve hiked the Fed Funds target rate range by 50bps to 4.25%-4.5%. The move was widely expected, and represents a step down in the pace of hikes compared to the 75bps moves at the last four FOMC meetings.
  • The overall tone of communications was hawkish. The median dot shows rates at 5.125% at the end of next year, and then only a very modest cutting cycle for the rest of the forecast horizon.
  • We continue to see a lower terminal target rate range of 4.75%-5%, as we think the economy will be in recession before the Fed can push rates much higher. However, near term demand side resilience, resulting in a later onset of recession, would create upside risk to our rate forecasts.
  • The Fed’s economic projections were more downbeat, with higher inflation and lower growth. While the forecasts increasingly recognise that “immaculate disinflation” is not possible, with a prolonged period of economic pain necessary to restore price stability, we think they are still too optimistic.
  • As such, we continue to expect a much more significant rate cutting cycle from late 2023 than envisioned by the Fed or priced by markets.

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