By Allison Boxer, US Economist at PIMCO
The Fed will start its “expeditious” effort to remove monetary policy accommodation this week as they hike the fed funds rate 50bps, the largest rate increase since 2000, and announce a plan for balance sheet runoff. Fed officials have pivoted significantly more hawkish since the last FOMC meeting, and endorsed a front-loading of monetary policy tightening amidst ongoing inflation risks. Given the strongly hawkish communication and detailed balance sheet preferences provided ahead of this meeting, we think the policy decisions will leave little surprise for market participants. Instead, all eyes will be on guidance in the statement and press conference for any hints on the speed ahead. With the Fed’s preferred inflation measure printing above 5% in 1Q and a notable continued absence of mentions of downside risks in recent Fedspeak, we expect the Fed to remain on course for another 50bp hike in June. However, the contraction in 1Q real GDP was a reminder of the bumpy path “reopening and rebalancing” the economy is likely to take. After “expeditiously” reversing pandemic-era rate cuts and getting balance sheet rolloff underway, we still ultimately look for a slower pace of policy tightening as global growth slows and “stuff happens” along the way.