Changing My Call for February’s FOMC Meeting to 25bps

With still one Fed speaker to go before the pre-meeting blackout, Waller (voter, hawk), I am changing my call to a 25bp hike from previously 50bp. This is because Brainard (voter, dove) and Williams’ (voter, dove) speeches yesterday implied support for a 25bp hike. So, even if Waller supports a 50 bp hike, (and I suspect he will) he won’t be representative of the median FOMC voter.

Brainard’s description of the current economic situation was extremely dovish, even more so in the Q&A than in her speech. One example in her speech is her description of fiscal policy, where she minimized the swing in fiscal policy from FY2022 to FY2023. In her concluding paragraph she supported slower hikes as these will enable the Fed “to assess more data”.  To me, this implies 25bp, even if she did not say so explicitly.

Williams’ speech was less dovish. For instance, he stated: ‘bringing inflation down is likely to require a period of below trend growth and some softening of labour market conditions’ and, against Brainard, ‘a reduction in inflation without a significant loss of employment remains possible’. In the Q&A Williams minimized the speed of hikes and instead stressed the terminal FFR as more important. This makes me think he will support 25bp.

Bottom line

Doves and hawks are moving apart on their reading of the economy and inflation trends, in part because of the discrepancy between strong employment and demand data (ignoring January seasonality distortions) and slowing inflation. I expect this macro backdrop to persist in Q1 in my latest weekly. Against this backdrop, the December SEP i.e. 5.1% terminal FFR and no cut in 2023 is likely to remain the compromise between FOMC doves and hawks. 

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

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