US | Fed slows to 25bp hike and recognizes that “the disinflationary process has started”

As expected, the Fed kicked off the year by downshifting again its tightening pace with a 25bp hike, pushing the fed funds rate into a 4.50-4.75% target range, its highest level since late 2007 when the Fed made the first rate cut amid the outbreak of the global financial crisis.

Key points

• Key points:
• Tweaks to the wording signal that things are going better on the inflation front, but the Fed was careful not to hint that there may be only one more hike in the pipeline, as it retained the “ongoing increases” (more than one) reference.
• Recent mounting evidence that the economy appears to be already on a sustained disinflationary process gave Powell less leeway to reinforce the required hawkishness to reverse the probably overoptimistic market’s expectation that inflation will come down faster than projected by the Fed.
• The Fed stuck to its policy outlook stating that there is more to come -ongoing increases in plural signals two more 25bp hikes- as it is “strongly resolved” to complete the task of bringing down inflation to 2%, but also hinted that we are not very far from peak rates.
• We continue to think that incoming data will convince the Fed to pause at its May meeting after the fed funds rate peaks at the 4.75-5.00% target range following a last 25bp hike in March.

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