Fed’s hawkishness is peaking: Takeaways from the July meeting
In Short
Despite the unanimous decision on another 75 bps hike, the July meeting delivered a rather dovish message.
Highlights:
- The expected 75 bps rise came with hints that the steepest part of policy normalisation has probably ended. Chair Powell remained deliberately vague about the September meeting, but hinted that a smaller 50 bps increase is possible. This is indeed our expectation.
- Going forward, the FOMC points to the fact that June’s “dots” remain the relevant guidepost. They show the policy rate peaking at 3.8% and no easing before 2024, contrary to market expectations. Given our below consensus growth forecast, which entail an almost 50% probability of recession in 2024, we project a lower (3.4%) peak rate, reached in Q1 2023 .
- With low oil prices contributing to moderating inflation expectations and some signs of cooling in activity and employment growth, inflation is no longer the only focus for the FOMC. While acknowledging the slow- down in activity, it dismissed fears of an impending recession, and still showed high conviction that it can be avoided.
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