The Fed aims at shock therapy against inflation
- 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.