(Reuters) - As the U.S. economy holds up better than expected in the face of aggressive interest rate hikes, markets have started pricing in a higher peak rate as the Federal Reserve battles sticky inflation in a tight labor market.
Fed Chair Jerome Powell's hawkish testimony to congress on March 7 further strengthened those views, with money markets now pricing in an over 65% chance for a larger 50bps hike in March, compared to less than 30% before the testimony.
The Fed funds rate is currently at 4.5-4.75%, and traders see it peaking at 5.62% in September.
Following are expectations from some major investment banks and brokerages:
Banks March hike Terminal rate Comments
expectations expectations
(in bps)
NatWest 50 5.75% * "We put the odds at about 60%
that the FOMC hikes by 50 bps (in
March)"
* Sees "reasonable
BlackRock (NYSE:BLK) chance that the Fed will have to
bring the Fed Funds rate to 6%,
and then keep it there for an
extended period"
Goldman 25 5.5% * Sees "some risk" of
Sachs - 5.75% a 50bps hike in March
* Sees 25 bps hikes in
May, June, July
Barclays (LON:BARC) 25 5.40% * Sees "good chance" of 50 bps
hike in March, especially if March
10 payrolls data is robust
* Expects more Fed rate setters to
revise their 2023 dot from 5.1% to
5.4% in March meeting
BofA 25 5.25% - 5.5% * Expects 25 bps hikes in May and
June
* "Resilience of demand-driven
inflation means the Fed might have
to raise rates closer to 6%"
* Expects U.S. economy to tip into
recession in Q3 2023
* "Our base case has
Citi 50 5.5%-5.75% core PCE running 4.5-5% YoY for
the next 5 months and Fed
officials might feel a terminal
rate in the high 5% range is
reasonable"
Nordea 25 5.75% - 6% * Expects Fed to continue hiking
by 25 bps until the September
meeting
Wells 25 5.25% - 5.5% * Anticipates Fed will finish
Fargo raising rates by mid-year 2023;
does not expect rate cuts in 2023
UBS 25 5.25% - 5.5% * "If upcoming data is
too strong then the Fed could feel
compelled to hike by 50bps (in
March)"
* Expects 25 bps hike
in May, June
* "We project the FOMC turns
toward cutting rates at the
September meeting, and brings the
funds rate back down to a still
restrictive 4.00% to 4.25% at the
end of 2023."
RBC 25 5.5% * Says terminal of 5.5% is
unnecessary; "there seems to be an
overreaction to recent data"
* Expects Fed to cut rates if
unemployment rate reaches 4.5% by
year-end and coincides with core
inflation slowing to around 3%
Morgan 25 5.13% * Sees return to 50 bps hike as
Stanley unlikely
* Expects first rate cut in March
2024
Deutsche 25 5.60% * Bar for return to a 50 bps pace
Bank is high
* Expects first Fed rate cut in Q1
2024
* Sees moderate recession starting
Q4 2023
J.P.Morgan 25 5% - 5.25% * Sees only 20% chance of 50 bps
hike in March
* Expects another hike in May with
the "chance of June"
* Does not expect the Fed to ease
later this year