U.S. Desk Strategy Market Views

The cuts roadmap passes thru QT-tapering and greater confidence on inflation

The January FOMC event started off neutral to slightly hawkish with a more balanced statement on the outlook with conditionality on the first cut. The presser saw chair Powell sound his typical dovish-self until mid-way when he clearly pushed back on the March cut. That hawkish U-turn came out of nowhere and markets reacted accordingly. It was almost as if chair Powell had to emphasize the rate cut conditionality outlined in the statement. This was followed by openly stating QT-tapering will be discussed in March, all suggesting that the Fed is trying to sequence its way to an easing cycle and not rush to cuts.
In terms of our view, let’s see how the jobs and inflation data unfolds between now and the March meeting. In addition, if financial conditions were to have an acute tightening and/or banking stress returns in the weeks ahead, that could keep the March cut in play. Given our roadmap outlined in the preview, we are not ready to change our call, but a May cut looks more likely now than March.