The Federal Reserve hiked the Fed Funds target rate range by 50bps to 4.25%-4.5%. The move was widely expected, and represents a step down in the pace of hikes compared to the 75bps moves at the last four FOMC meetings.

The overall tone of communications was hawkish. The median dot shows rates at 5.125% at the end of next year, and then only a very modest cutting cycle for the rest of the forecast horizon.

We continue to see a lower terminal target rate range of 4.75%-5%, as we think the economy will be in recession before the Fed can push rates much higher. However, near term demand side resilience, resulting in a later onset of recession, would create upside risk to our rate forecasts.

The Fed’s economic projections were more downbeat, with higher inflation and lower growth. While the forecasts increasingly recognise that “immaculate disinflation” is not possible, with a prolonged period of economic pain necessary to restore price stability, we think they are still too optimistic.

As such, we continue to expect a much more significant rate cutting cycle from late 2023 than envisioned by the Fed or priced by markets.