Goldman Sachs, Barclays and a bunch of investment banks raised their estimates for U.S. policy rates on Thursday, following the Federal Reserve’s 75 basis point rate rise and hawkish message the previous day.
Goldman said in its note “the FOMC (Federal Open Market Committee) is willing to tolerate more labour market deterioration if necessary if inflation remains high.”
Goldman analysts also said they had expected a nod towards a slower pace of tightening in November, and were revising their forecast for rate hikes to 75 basis points (bps) in November, 50 bps in December, and 25 bps in February, for a peak funds rate of 4.5-4.75 per cent, versus 4-4.25 per cent previously.
Fed Chair Jerome Powell vowed on Wednesday that he and his fellow policy-makers would “keep at” their battle to beat down inflation, alongside a sobering new set of projections that foresees the policy rate rising at a faster pace and to a higher level than expected, the economy slowing to a crawl, and unemployment rising to a degree historically associated with recessions.
The projections signal another 1.25 percentage points in rate hikes by the year-end in the federal funds rate, which is currently in a 3.00-3.25 per cent target range.
“The committee is strongly committed to returning inflation to its 2 per cent objective,” the central bank’s rate-setting FOMC said in its policy statement after the end of a two-day policy meeting.
Goldman said the Fed’s dot plot also showed a median projection of 175 bps of total rate cuts in 2024 and 2025, but that they “would not put much weight on this”.
“In our view, if rate hikes solve the inflation problem without a recession, the FOMC would most likely wait until something goes wrong to cut rather than cutting just for the sake of returning to neutral.”
Analysts at Barclays Research revised their call for the funds rate to a 75 bps hike in November from 50 previously, and another 50 bps increase in December versus a prior forecast of 25 bps.
“This would bring the year-end fed funds target range to 4.25-4.50 per cent”, they wrote.
Barclays expects another 25 bps rate hike at the February 2023 meeting, pushing the target range to a cycle peak of 4.50-4.75 per cent, but a rate cut later in 2023.
Societe Generale economists expect a similar 75 bps hike in November and 50 bps in December.
“We project a mild recession in early-2024. The FOMC’s move increases conviction, and the risk is for a potentially earlier recession,” they said.