Next Wednesday, the FOMC will announce its decision on monetary policy. Analysts at Rabobank point out it has become increasingly likely that the Fed will slow down its hiking cycle to 25 bps.

Decline in inflation has increased the probability of smaller hikes

“The next meeting of the FOMC, on January 31 and February 1, takes place against the backdrop of falling inflation and signs of a weakening economy. What’s more, the annual rotation of regional bank presidents with voting rights is expected to lead to a more dovish set of voters. Therefore, it has become increasingly likely that the Fed will slow down its hiking cycle to 25 bps on February 1.”

“Today’s PCE deflator data for December were largely in line with market expectations and confirmed what we already knew from the CPI data, which is that the peak of inflation is behind us, unless we get new inflation impulses, such as new negative supply shocks or the wage-price spiral getting out of hand. Headline PCE inflation, which is the Fed’s preferred measured of inflation, slowed down to 5.0% year-on-year and core inflation fell to 4.4%.”

“We continue to think that based on the fading momentum of inflation, the FOMC is likely to stop at a 4.75-5.00 target range and pause for the remainder of the year.”

“We still see upside risks to inflation and the federal funds rate during the course of the year if new negative supply shocks take place and/or the wage-price spiral gets out of hand.”