The Fed dashes hopes of an early pivot

In Short

In today’s meeting the Fed had to strike a difficult balance between acknowledging the sizeable tightening in financial conditions implemented so far and the need not to feed speculation about too early a pivot. Looking at the first market reactions, it succeeded.

Highlights:

  • The widely expected and unanimous decision to raise the Fed funds rate by 75bps for the fourth time was followed by the acknowledgment of the fast and sizeable tightening implemented. Moreover, the return of inflation to 2% will need to be gradual in order not to disrupt economic activity.
  • But it is premature to think about pausing. The risk of not doing too much to stem inflation remain higher than that of overtightening. Rates may need to go up by more than what expected in September (4.6%, which is also our latest forecast), and this reduces the window for a soft landing. We expect just 0.2% growth in 2023 with an outright contraction in H1. 
  • Markets’ hopes of an early pivot were disappointed again. After a brief rally before the press release, the S&P 500 dropped by 2.5%
     

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The Fed dashes hopes of an early pivot

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