We doubt that the unexpected 1.4% annualised decline in first-quarter GDP will stop the Fed from hiking its policy rate by a bigger 50bp next week or from launching quantitative tightening. The Fed will stress the ongoing strength of employment growth, the temporary impact from the Omicron wave and the pick-up in the growth rate of final sales to private domestic purchasers, which is arguably a better gauge of underlying demand. But the bottom line is that with inflation rampant it simply doesn’t have a choice; policy needs to be tightened rapidly regardless of the costs to the real economy.
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