US | Fed set to shift gears down to a 25bp hike but to signal that the job is not yet done

Chair Powell will likely insist that rates are still not yet “sufficiently restrictive” in an attempt to avoid an unwelcome further downshift in the yield curve and an unjustified easing of broad financial conditions.

Key points

• Key points:
• The Fed is widely expected to shift down to a 25bp hike at its first meeting of the year to take the fed funds rate to a 4.50-4.75% target range.
• However, the Fed will attempt to prevent any small change in its language from being interpreted as dovish and will convey a message that the job is not yet finished.
• Several FOMC voting members said the Fed is determined to stay the course on their fight against inflation through continued tightening, and that they remain optimistic on the possibility of a soft-landing.
• The Fed is not likely to reverse market expectations of rate cuts starting in 2H23 in a backdrop of weakness spreading to hard data across all sectors, job creation and wage slowing, and easing inflation.
• For now, we will likely stick to our 4.75%-5.00% peak rate forecast with the Fed moving to the sidelines following March’s hike, as the discussion, and more pressing concerns, continue to gradually shift from (high) inflation to (weak) growth.

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