Strong economic momentum points to a higher terminal rate in the United States. Economists at ANZ Bank have revised up their Fed Funds Rate forecast by 50 bps to 5.50%.

Cyclical components of inflation may stay high

“We have revised up our FFR forecast range by 50 bps to 5.25-5.50%. We now expect the FOMC will extend tightening through Q2 and anticipate 25 bps rate increases at the May and June FOMC meetings, in addition to the March hike that we already expected.”

“Economic momentum at the end of last year and in early 2023 has been stronger than anticipated. We have revised up our Q1 GDP forecast to 0.5% QoQ vs 0.3% QoQ, inferring resilient growth. Based on available and expected data, we have downgraded our near-term view of recession risks.”

“Whilst the increase in January Nonfarm Payrolls (517K) was way above “normal” and may not be repeated in coming months, there is no denying labour market strength. This implies cyclical components of inflation may stay high.”

“We think the FOMC will have to upgrade its GDP forecasts and reduce its unemployment forecasts when it publishes its Summary of Economic Projections in March. The risks to the median dot plot lie to the topside.”