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The Fed aims at shock therapy against inflation

In breve

The Fed delivered the radical change in policy required by stubbornly high inflation and the spike in expectations. The 75bps hike recently hinted at materialised, and the FOMC plans foresee another 175bps in tightening for the rest of the year. The press release underlines the overall good state of the economy, hints at the possible stabilisation in employment and highlights the risks for the global outlook.

Highlights:

  • The Fed radically stepped up its action plan to tame inflation. Not only it raised the Fed funds rate by 75bps but also signalled the intention to push it to 3.4% (90bps above neutral) by the end of the year. Rates should then peak at 3.8% next year before sliding back to 3.4% in 2024.
  • The economic projections reflected the tighter policy stance, with a sizeable worsening in the growth outlook and an increase in unemployment. This – the FOMC expects – will allow for a drastic reduction in inflation next year.
  • Fighting inflation is a priority and the current strength of the economy limits the risk of a recession. Given our concerns about a sharp slowdown, we are not sure that the Fed will succeed in reaching such and elevated peak in the policy rate.

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The Fed aims at shock therapy against inflation
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