Fed left rates unchanged at 5.25–5.50% and made no changes to the balance sheetreduction plan at its December 12–13 meeting. The decision was unanimous. Thismarks the third meeting in a row where the Fed stays on hold, making it all the clearer that the Fed is done hiking (last hike came back in July). Our overall impression is that the Fed was more dovish than we had expected.
The median dot in the updated dot plot implied a total of 75 bps worth of cuts next year (to 4.50-4.75%), which was one more rate cut than we had expected. However, keep in mind that there is a rather wide dispersion between different Fed officials’ dots. We look for the Fed to start cutting rates in June and continue to cut at every subsequent meeting in 2024. The risk to our call is balanced but with a slight tilt to the downside. On the one hand, inflation and labour market data continues to hold up rather strongly, which if sustained could mean the first rate cut may come later than we currently expect.
In our view, currently the risk of EU recession and increase in unemployment is higher than the risk of inflation staying above 2% target. We maintain our forecast that the ECB will start cutting rates in April and will lower them by 150 basis points during 2024
-Swedbank
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