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.
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).
You can now read the full whitepaper at the link below