The Fed took the easiest policy option by raising the interest rates by 25 basis points. We believe it was also the right option.
Simona Mocuta comments on the latest Fed hike.
Speaker : Simona Mocuta
The Fed took the easiest policy option at the March meeting, but it was also the right option for this moment in time.
What do we mean by that? We've been arguing amid the market turmoil over the last few days, that probably the best thing for the Fed to do would be to simply stick to what they said they would do back in December. And that is exactly what they did. They raised interest rates by 25 basis points as we suggested they should. And they also kept the terminal rate estimate unchanged at 5.1%.
We also thought this is the right thing to do. Admittedly, we are not convinced that another rate hike is truly necessary or that it would actually be delivered. But at this point in time, it makes sense for the Fed to keep that option in its back pocket. The inflation battle, after all, is not fully won, although it is in the process of being won.
Now, where we do have some differences with the Fed outlook is mostly in regards to the 2024 projections. Two things have happened. On one hand, the Fed raised slightly its inflation forecast for next year and at the same time they took out one of the rate cuts they previously had anticipated. So now they are anticipating three rate cuts instead of four previously.
For our part, we think actually the inflation profile will be more benign and we have 200 basis points worth of cuts from the peak to the end of 2024. So that is a pretty material difference in the outlook further out in time. It is, however, a 2024 question and given the more immediate concerns about the near-term outlook, perhaps that is a debate for another time.
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