The Fed tightens aggressively, aiming at least at a “softish” landing

In Short

The Fed confirmed its willingness to catch up with rising inflation by increasing the policy rate by 50bp for the first time since 2000 and warned about further inflationary pressures stemming from the war in Ukraine and lockdowns in China. Moreover, it laid out the plan for shrinking the balance sheet at roughly twice ad fast as in the previous quantitative tightening.
Market Commentary

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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The Fed tightens aggressively, aiming at least at a “softish” landing
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