The Fed: high for a bit less long

In Short

The Fed struck a balance between the evidence of the improved inflation outlook and the market expectations of a swift monetary easing by indicating a faster path of rate cuts. Rates are now seen at 4.6% next year, 50bps lower than in September, as the rate hike for this year was obviously taken out and another cut for 2024 added. By 2026, when inflation and unemployment will be around target, the policy rate is still seen at 2.9%, some 40 bps higher than the long term, neutral, level.

Highlights:

  • The Fed acknowledged the better inflation outlook and the employment slowdown but was careful not to give totally in to market expectations of a quick pace of rate cuts. The 2024 year-end appropriate policy rate was lowered by 50 bps, implying a 75bps reduction from the current level (vs the around 100 priced by futures). The short-term inflation forecast was marked down, and growth revised up, but the macro outlook was little changed. The median neutral policy rate is still seen at 2.5% but the distribution of the projections is heavily tilted upwards.
  • Chair Powell sounded rather optimistic on inflation and not particularly worried about the last leg of disinflation being particularly difficult. Risks are balanced and the Fed is aware of the risk of keeping rates tight for too long. Still he did not commit to a timing of the first cut nor stated with precision the economic conditions that will trigger it. 
  • We confirm our view of a 100-bps reduction next year, we see the first cut in May, when the Fed will have enough evidence on disinflation. 

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The Fed: high for a bit less long
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