March 8 (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
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March hike expectations (in bps)
|
Terminal rate expectations
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Comments
|
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NatWest
|
50
|
5.75%
|
* "We put the odds at about 60% that the FOMC hikes by 50 bps (in March)"
|
|
BlackRock
|
* Sees "reasonable chance that the Fed will have to bring the Fed Funds rate to 6%, and then keep it there for an extended period"
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Goldman Sachs
|
25
|
5.5% - 5.75%
|
* Sees "some risk" of a 50bps hike in March
* Sees 25 bps hikes in May, June, July |
|
Barclays
|
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 |
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Citi
|
50
|
5.5%-5.75%
|
* "Our base case has 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
|
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Wells Fargo
|
25
|
5.25% - 5.5%
|
* Anticipates Fed will finish 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." |
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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% |
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Morgan Stanley
|
25
|
5.13%
|
* Sees return to 50 bps hike as unlikely
* Expects first rate cut in March 2024 |
|
Deutsche Bank
|
25
|
5.60%
|
* Bar for return to a 50 bps pace 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 |
Compiled by the Broker Research team in Bengaluru; Editing by Saumyadeb Chakrabarty, Sweta Singh and Anil D'Silva
