Fed close to peak. Cuts in 2023 still ruled out despite credit squeeze

In Short

The expected fallout from the banking sector led the Fed a with respect to the bold statements made until two weeks ago, but should not be disruptive enough- accordogn to the FOMC – to trigger rate cuts this year. The Fed expect a significant squeeze in credit standards which will work though the economy much like an interest rate increase.

Highlights:

  • The FOMC members voted unanimously for another 25bps rate rise. The press release acknowledged the impact of the banking turmoil but reaffirmed the commitment to fighting inflation, whose projected path has not changed much since the Dec. meeting.
  • The dots imply only another hike, a U-turn from the hawkish rhetoric that preceded the banking turmoil, but the FOMC still rules out cuts this year. For 2024 a flatter path of easing is foreseen compared with December. The FOMS stil sees a path for soft landing. We are less optimistic and pencil in rate cuts already in Q4.
  • Chair Powell wanted to reassure on the state of the banking sector, but conceded that it is too early to estimate the impact of the coming credit tightening on the economy. Both an internal and an independent review will be carried out to address the supervisory flaws.

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Fed close to peak. Cuts in 2023 still ruled out despite credit squeeze
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