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Expectations of a Fed slowdown intensify

By Charbel Kadib
3 minute read

Markets are increasingly expecting the Federal Reserve to adjust its monetary policy strategy amid mounting evidence of an easing in inflationary pressures.

The US Federal Reserve is set to hold its next Federal Open Market Committee (FOMC) meeting from 31 January to 1 February, when it is expected to tighten monetary policy levers for the eighth time in less than a year.

The federal funds rate currently stands at between 4.25 to 4.5 per cent following a 50 basis point (bp) hike in December 2022.

Since commencing the tightening strategy, the Fed has actioned 75 bp hikes at four of its FOMC meetings, with two 50 bp increases and just one 25 bp hike to kick off the cycle in March 2022.  


However, according to ANZ Research, the pace of tightening is set to change.

The Fed is tipped to announce a 25 bp increase at its next meeting, taking the funds rate to 4.5 to 4.75 per cent.

“The FOMC has entered a more nuanced phase of the normalisation cycle,” ANZ Research noted in its latest analysis.  

According to the research group, four factors are behind the shift — the most rapid tightening in 40 years over the course of 2022, suggesting it is no longer necessary to “front-load” rate hikes; the balancing of economic risks; the laggard impact of rate hikes in 2022; and the coming rise in real interest rates.  

“We, therefore, think that 25 bp rate rises are now appropriate as the FOMC fine-tunes its way to ‘sufficiently restrictive’,” the group concluded.

This sentiment is shared by James Knightley, chief international economist at ING Economics, who said he believes interest rates are “getting very close to the peak”.  

“…We have further evidence of weaker activity and an increasingly benign inflation backdrop, which clearly suggests we are in the end game for Fed rate hikes,” he said.

The economist said he also expects the Federal Reserve to action a 25 bp hike in February, adding recent economic indicators and expectations of a looming recession “diminish the case for additional rate hikes” and increase the likelihood of cuts. 

“With recessionary forces intensifying and inflation looking less and less threatening, the prospects for Fed rate cuts later in the year are growing,” Mr Knightley said.