WOOD Flash – US macro: Fed preparing the grounds for a pause

The FOMC at the Fed has decided to raise the target range for the federal funds rate by 25bps, to 4.25-4.75%, in line with expectations. The tone conveyed by Chairman Powell was more balanced than before and there was a cautiously optimistic message with regards to the recent developments on the inflation front. The subtle signals from the press interaction suggested that a pause is imminent and that the focus is now on holding rates constant at a level for a period of time, rather than hiking further towards the 6.00-6.50% level. Looking ahead, we expect two further 25bps rate hikes at the following meetings, taking the target range to 5.00-5.25%, after which we anticipate a pause. The next move beyond that should be downwards, which we see materialising by the end of this year. Going forward, we expect the policy rate to drop to 4.50-4.75% by the end-2023E and 3.25-3.50% by end-2024E.