It's not just about inflation anymore. Central bankers are now tasked with balancing both the fight against rising prices and the need for overall financial stability.

Before last week’s bank sector turmoil, it seemed like the Fed might need to keep pressing on the economic brake—consensus expected the Fed to hike another full percentage point to a final rate of ~5.7% before the year was up. 

Heading into Wednesday’s Fed meeting, even in light of last week's uncomfortably strong inflation data (headline prices increased 0.4% m/m and core inflation accelerated 0.5% m/m), Fed hike expectations have come down significantly.

We think that's largely a symptom of the current banking stress, which is pushing the cost of credit higher and making lending standards tighter in its own right. In a way, prevailing market conditions may be doing the Fed's work for them. We think these dynamics ought to slow growth and inflation, and potentially accelerate the path to recession.

This considered, we’re likely now in the final stretch of the Fed’s rate hiking process. Regardless of this week’s decision, it’s possible that they consider hiking again in May and potentially June.

This chart shows the Fed funds futures implied policy rate on March 8, March 13, and March 15, from March 2023 until January 2024

Source: Bloomberg Finance L.P. Data as of March 15, 2023. Note: Current and today stand for March 15, 2023.

All market data from Bloomberg Finance L.P., 3/21/23

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