Fed: Staying the course until the job is done

FOMC statement and press conference: On 14 December, the Federal Reserve (Fed) hiked the Fed Funds Rate by 50bp to 4.25-4.50%, a step down after four consecutive 75bp rate hikes. This takes the Fed Funds Rate further into restrictive territory. 

Fed- Staying the course until the job is done

The slowing in the pace of the rate hike was widely expected. The Fed believes in a soft landing and sees the terminal level for rates at slightly above 5%. Overall, the dot plot and Chair Powell’s press conference were hawkish, with Powell maintaining full commitment to inflation.

View on the Fed balance sheet: The reduction in the size of the Fed balance sheet should continue, with shrinking expected to be around $1tn in 2023. A premature end to Quantitative Tightening (QT) could come from (1) a strong recession (not our scenario) or (2) from a strong impairment of market functioning (market liquidity remains a key element to watch), or (3) reserve scarcity (which ended QT last time).

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