ING global economic outlook 2023 December 2022 3 Fed will respond early and fast with rate cuts Recent falls in Treasury yields and the dollar, coupled with tighter credit spreads, are undermining the Federal Reserve’s efforts to control inflation. Consequently, with the Fed continuing to suggest the risk of doing too little outweighs the risk of doing too much in this battle, they appear prepared to accept a recession to ensure inflation is defeated. Given this situation, there is some upside risk to our forecast of 100bp of rate hikes from here. But given the prospect of recession and sharply lower inflation, the Fed will be in a position to cut interest rates in the second half of the year. Remember as well that the Fed has a dual mandate, which includes maximising employment. This, together with the fact it has an “average” inflation target, offers the US central bank greater flexibility to respond with stimulus versus most others.