Highlights:

• The expected 50bp rate rise and the announcement of the balance sheet reduction materialised, as the Fed continues to highlight the risk of higher inflation and remains confident on the strength of domestic demand and the labour market.
• With the lowest employment rate in five decades, strong wage growth and nearly two job openings per unemployed per person, the Fed is reasonably confident to be able to cool down inflation without harming the economy. It will therefore move quickly rates to the neutral level (2% to 3%) and then will decide whether to tighten further. A 50 bps hike is to be expected in both June and July.
• Quantitative tightening will begin on June 1 and will reach full speed (a monthly reduction of US$ 60 in Treasuries and US$ 35bn of MBS) after three months. We expect the balance sheet to reach its long-term value by mid- 2025.
• Markets were relieved by the exclusion of 75bps rate hikes, and the expected policy rate at the end of the year was revised sharply down to 2.8%. Stock prices rose to the highest reading in the week. Given our below consensus forecast for growth this year we expect the policy rate to peak at around 2.6% at the beginning of 2023.

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