Why the Fed must break oil

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Goldman with the note. The more we rally here the more this tightening is undone. Moreover, US growth needs to fall below potential if inflation is to fall. I am no inflationista but still think more will be required in the US.

Our US Financial Conditions Index (FCI) has tightened by 80bp since Fed officials forecasted 2.8% growth for 2022 (Q4/Q4) in the March Summary of Economic Projections (SEP). How large a growth downgrade should we expect from the Fed if the recent FCI tightening is sustained?

Historically, we find that a 100bp FCI tightening leads to a 0.7pp downgrade in year-ahead SEP growth forecasts. Combined with the 2.7% year-ahead growth forecast in the March SEP, this suggests that the recent FCI tightening alone would push the June SEP year-ahead forecast down to roughly 2% and thus much closer to potential.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.