La Française: Front-loading of tightening with a methodical approach to curb inflation and land softly
La Française: Front-loading of tightening with a methodical approach to curb inflation and land softly
By François Rimeu, Senior Strategist, La Française AM
After a cautious 25 bps increase in the Fed Funds Rate at its March meeting, it is expected that the Federal Open Market Committee (FOMC) will hike rates by 50 bps to fight against inflation at its May 3-4 meeting. In addition, Federal Reserve Chair Powell should announce officially the balance sheet runoff plan.
Please find below what we expect:
- The FOMC to raise the Federal Funds Target Range to 0.75-1.0%. Chair Powell will signal willingness to hike rates by another 50 bps at one or more upcoming meetings, because inflationary pressures remain strong, and the labor market is ‘extremely tight’. We believe Chair Powell will not rule out a larger rate increase (i.e., a 75 bps hike) if needed, even if it is not on the table at this stage. He will underline that the pace of policy tightening will be data dependent.
- Federal Reserve Chair Powell to reaffirm the need to move “expeditiously” to bring the Fed Funds Rate to a more neutral level (2.25-2.50%); the degree of overshoot will depend on the inflation outlook.
- The Fed to announce quantitative tightening by no longer reinvesting the principal payments received from its securities holding. According to the March FOMC minutes, the process will involve a maximum monthly cap of $95bn ($60bn for treasuries and $35bn for mortgage-backed securities) with caps phased in “over a period of three months or modestly longer if market conditions warrant”. We expect runoff to start in June.
We expect the FED to maintain its hawkish tone despite ongoing risks (i.e., China’s strict Zero-Covid policy, the war in Ukraine). This meeting may push US interest rates higher.