Research US - Fed Preview: Too early for a pivot
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We expect Fed to hike by 75bp next week, which is fully priced in by the markets.
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The recent soft macro data and the WSJ article suggesting that moderation in hiking pace could be near have sparked a 'pivot' rally in the markets - we think it is still too early.
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High spot core inflation, only modest tightening in real financial conditions and rising inflation expectations leave Fed little room to manoeuvre.
Anything but 75bp would be a major surprise to the markets next week, so the focus will be on how Fed sees the balance of risks for policy tightening going forward. Is FOMC looking to moderate the pace of hikes already in December or is further tightening in financial conditions still needed? We lean towards the latter.
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