US | Will financial instability concerns outweigh Fed’s focus on inflation?

Summary

The Fed will stick to its resolve to bring inflation down with a 25bp hike but will signal more uncertainty on future decisions.

Key points

• Key points:
• Earlier this month, Chair Powell suggested during his semiannual testimony before the Congress that the FOMC would be discussing whether to raise the fed funds rate by 25 or 50 bps.
• The dilemma for the Fed changed following broader financial stability concerns triggered by the fallout of Silicon Valley Bank (SVB) and Signature Bank, which led to high uncertainty on the Fed’s next move.
• We think that a 25bp hike is more likely than not. A bigger 50bp hike is now likely off the table as recent shifts in financial markets have on balance tightened financial conditions.
• We think that significant upward revisions to the “dot-plot” in the updated Summary of Economic Projections are now less likely.
• Some think that the Fed will not raise rates tomorrow. What seems more likely in our view is that the Fed likely became more cautious (i.e., somewhat less hawkish) during the blackout period.

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