The Fed pauses, but hiking looks far from finished
- The FOMC paused rate hiking but delivered a very hawkish surprise by increasing by 50 bps its year-end target for the policy rate. It follows an upward revision of the short-term expectations for growth and above all core inflation. Despite little change in the economic projections for 2024 and 2025, the FOMC projects a higher policy rate also then.
- In the Q&A session, chair Powell tried to reassure about the outlook for inflation and rates. The labour market is going back into balance and this will help disinflation, but the recent data show that price pressures remains too high and this is behind the almost unanimous decision to raise rates further.
- Powell conceded that the full impact of the past rate hikes and the banking stress have not been unfolded in full and how the economy will react remains uncertain. This latest hawkish turn, if implemented, will add further pressure to an economy that we see entering into a recession after the summer.
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