The central bank delivered a dovish 25bps rate increase and the accompanying statement hinted at the need for fewer hikes, as the banking sector turmoil does some of the Fed’s job. But this turbulence also increases our confidence that the US economy will likely enter a recession later this year, which we believe will see the Fed loosen policy significantly.
As we expected, the Federal Reserve (Fed) hiked rates by 25bps to a new target range of 4.75-5%.
The communication accompanying the decision was slightly dovish. The guidance in the statement seems to point to the need for less future hikes. And there was no increase in the expected terminal rate in the dots.
Powell clearly acknowledged that banking sector instability will likely tighten financial conditions, albeit to an unknown degree.
We had already taken 25bps out of our terminal rate call after the recent volatility, but will monitor incoming data closely to ascertain whether their impact on credit conditions will end up being larger. We further assess the implications of this here.
Overall, we see recent events as further evidence that the US economy will likely enter a recession later this year. The path to a soft landing is looking increasingly narrow.
The rapid repricing of the expected path of Fed policy in recent weeks also suggests that our expectations for significant policy loosening from the Fed could rapidly become consensus in a recession. We explore this further here.