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Banks scramble to change Fed rate calls after hawkish shift

EconomyJan 27, 2022 11:05AM ET
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2/2 © Reuters. FILE PHOTO: A logo of Nomura Holdings is pictured in Tokyo, Japan, December 1, 2015. REUTERS/Toru Hanai//File Photo 2/2

By Saikat Chatterjee

SINGAPORE (Reuters) -Strategists at the world's top investment banks scrambled to change their Federal Reserve rate calls on Thursday after policymakers emphasised at a policy meeting that it would tighten policy to clamp down on inflation.

The Federal Reserve on Wednesday said it was likely to hike interest rates in March and reaffirmed plans to end its bond purchases that month, surprising investors who had already braced for as many as four rate hikes until the end of the year.

Deutsche Bank (DE:DBKGn) strategists now expect policymakers to raise interest rates at each meeting from March to June and then revert to a quarterly tightening cycle from September totaling five rate hikes this year.

Analysts at Nomura, Japan's biggest brokerage and investment bank, said they expect the U.S. Federal Reserve to hike its benchmark rate by 50 basis points (bps) in March.

Analysts at TD Securities, meanwhile, said they now expect four rate increases of 25 basis points, rather than three. They are also looking for the Fed to begin reducing its nearly $9 trillion balance sheet in May, compared to a previous forecast calling for the central bank to do so in September.

At the conclusion of Wednesday’s meeting, Fed Chairman Jerome Powell said a decision would be made in coming months on when to start shrinking the central bank's government bonds and mortgage-backed securities.

BNP Paribas (OTC:BNPQY) expects as much as six 25 bps hikes in 2022 from four earlier, and expects the fed funds target range at 2.25-2.50% at end-2023, 25 bps higher than a previous forecast.

"Our new base case for six hikes this year poses challenges to our bullish outlook for US equities," the French bank's strategists said in a note.

Powell did not rule out such a move when asked about it after Wednesday's Fed meeting.

"He repeatedly appeared to differentiate the upcoming hiking cycle from the last time the Fed normalised its policy rate at a roughly quarterly pace," Nomura's analysts said in a note.

"We now expect a 50 bp rate hike at the March (Fed) meeting, followed by three consecutive 25 bp hikes in May, June and July," they said, adding that another 25 bp hike was expected in December.

Fed funds futures, which track short-term rate expectations, are now pricing nearly five rate increases of 25 bps each this year, up from four expected hikes before Powell's news conference.

Some major investment banks like Goldman Sachs (NYSE:GS) and HSBC are sticking with their rate forecasts of four and three rate hikes respectively, betting the recent selloff in markets will lead to a tightening in financial conditions.

"The interplay of Fed policy, financial conditions, and the growth outlook could make it hard for the Fed to actually deliver consecutive hikes, even if they feel like a natural forecast along the way," analysts at Goldman Sachs said.

Banks scramble to change Fed rate calls after hawkish shift
 

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Comments (7)
bert prince
bert prince Jan 27, 2022 4:06AM ET
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all thedse strategists kept explaining equities would go up, rates will stay subdued with cpi @7% in the us ?they have no clues
Darrell Peterson
Darrell Peterson Jan 27, 2022 2:59AM ET
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Transitory, That's what the poindexter said a few months ago. This is going to be one ***of a rug pull. Sad for the bottom 99.9%.
Adam Paine
Adam Paine Jan 27, 2022 2:37AM ET
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the fed is stuck in mud
Sunil Sugnani
Sunil Sugnani Jan 27, 2022 2:19AM ET
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People don’t realize that the main reason why inflation is going up is due to soaring gas prices which are completely manipulated by corrupt governments
Bipin Kochar
Bipin Kochar Jan 27, 2022 2:09AM ET
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It is extremely shocking the way Biden pushed up crude prices by escalating the Ukraine situation -
Joel Schwartz
Joel Schwartz Jan 27, 2022 2:05AM ET
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FED watched crude rally 20% this month alone and did nothing. They’re degenerates.
Marcus Berntsson
Marcus Berntsson Jan 27, 2022 2:05AM ET
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Fed? I would rather put it on Biden + the COVID crash in oil prices which made the banks refuse lend to oil prospects.
Vi Ma
Vi Ma Jan 27, 2022 2:01AM ET
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way to go 👏👏👏
 
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