Monetary Policy: The Pause that Refreshes?

That said, if the Fed is comfortable downshifting to 25bp in February, it may be a signal
that the committee is closer to terminal than it (and we) thought as recently as
December. Recent trends in inflation look more favorable – and trends in economic
activity look less favorable – than the median FOMC member projected in December.
Should these trends continue, it could open the door for a pause in rate hikes as early as
the March FOMC meeting (at a terminal of 4.75-5.0%). FOMC participants could justify
this on account of risk management – pausing to assess the lagged effects of prior
tightening – or from a real policy rate perspective. The December projections suggest
the median member desires a real policy rate of around 150bp; an earlier pause to hikes
would prevent monetary policy from becoming “too tight” as inflation falls. Again, this is
not our baseline outlook, but, if history is any guide, turning points in the economy can
be abrupt, and we cannot rule out an earlier end to policy rate tightening based on the
November-December data flow.