Weaker data likely to limit Fed to one more rate hike

The Fed put its rate hiking cycle on pause this week but, in a hawkish shift, its new projections showed the median fed funds rate rising to 5.6% by year-end, which is consistent with 50bp of additional tightening. We agree that the Fed will push ahead with another 25bp hike at the FOMC meeting in late July – the employment and core inflation data isn’t going to turn that quickly. But we think that weaker activity and employment, together with a more pronounced moderation in core inflation, will ultimately persuade the Fed that it doesn’t need a final hike in September.