Thomas Costerg, Senior US Economist, Pictet Wealth Management.

The Federal Reserve (Fed) meeting will conclude on 15 June (14:00 local time; 20:00 Geneva).

The Fed had previously committed to hike by 50bps in both June and July, but recent leaks in newspapers highlight the possibility of a step up to +75bps (which would be the first such hike since November 1994) especially after the strong May CPI print (+8.6% yoy).

The Fed’s reaction function seems still very much backward-looking (the Fed is panicking about current high inflation) and also very much driven by political pressure; the Fed is putting little weight on financial conditions and/or growth risks at the moment. While we’d expected a change in the reaction function over the summer, the probability of such near-term change seems to be dissipating as the Fed remains 1) very much focused on actual inflation (rather than seeing through the bump) while 2) global commodity markets remaining very volatile and amplifying the Fed’s inflation worries.

The risk to our Fed view is therefore that they continue hiking after September, even if US growth starts to wobble. From a growth point of view, continuing tightening may exacerbate the slowdown risks by end-2022/early 2023.

The Federal Reserve will also release an updated ‘dot plot’ (projections for the fed funds rate). In theory, the forecast should be unchanged as the December 2022 unemployment rate is likely to be maintained at 3.5% and the December 2022 core PCE inflation (excluding energy and food) forecast of 4.1% is still on track. But headline PCE inflation could be revised up, and that’s going to be the main reason why the Fed moves the dots up, on top of factors beyond economics, such as psychology, and politics.