“Due to tightening financial conditions, we expect a weaker US economic outlook, and a less aggressive Fed: a small increase in rates is still on the cards and then a pause.”
The tightening of monetary policy arrived late, as inflation had initially been considered temporary. The acknowledgement of more persistent inflationary pressures resulted in the Fed embarking on a very rapid and strong raising of rates, which should weigh on the economy in the second part of the year and is now producing some challenges. The economic landing, in particular, could be harder than initially thought. We are already seeing a tangible deterioration in the US economy, which should move into a recession in Q2. The credit crunch will impact growth and will determine how pronounced the recession will be. While globally the Chinese reopening will help, it will not be sufficient to offset the US hard landing.
Amid this gloomier economic outlook, the market is reassessing central bank actions. If, before the crisis, the market was debating a further strong rise or small rise in Fed rates, now the discussion is centred around no rise and a small rise, at a time when Quantitative Tightening is also being questioned.
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