Just over two weeks ago, the expectation was that the Fed could be looking to get the Fed funds rate up to 5.5-5.75%, with some commentators talking about 6%. Markets are now barely pricing one further rate rise (around 15bp at the May meeting currently) and are looking for cuts later this year (somewhere between 50bp and 75bp from the peak). We agree that we could get one final 25bp hike in May, leaving the Fed funds range at 5-5.25%. But higher borrowing costs and reduced access to credit mean a greater chance of a hard landing for the economy. Rate cuts, which we have long predicted, are likely to be the key theme for the second half of 2023 and we are favouring 75bp of easing in the fourth quarter of this year.
It is important to remember that the Fed never leaves it long between hiking and cutting rates. Historically, it has been just six months between the last hike and the first rate cut. - ING
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