The Fed: high rates for much longer

In breve

With a decidedly hawkish twist, the Fed did not deliver any rate hike but signals that a strong economy and sticky inflation will require the policy rate to stay at extremely high level for much longer. Moreover 12 out of the 19 members flag the need for another rate hike this year.

Highlights:

  • The expected pause in rate hikes had a distinctive hawkish flavour, as the dots point to another rate increase this year and, more importantly, a much flatter path of loosening in 2024, with only a 50bps reduction. The appropriate policy rate is expected to remain some 40bps above the long-term measure by 2026.
  • The path for a soft landing has opened wide, according to the Fed, which has revised massively up the growth projections and expect the unprecedented degree of tightening to raise the unemployment rate only marginally. There- fore, the economy needs and can withstand higher rates for longer to tame inflation.
  • At the same time, the hawkish bias helps the FOMC to keep all options open given the still large uncertainty on the economy and, by disappointing expectations of a quick loosening, should prevent an unwelcome loosening in financial conditions.
     

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The Fed: high rates for much longer

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