"Markets appear to be less than fully convinced that efforts to support small and midsize banks will prove sufficient. We think Fed officials will therefore share our view that stress in the banking system remains the most immediate concern for now," said Jan Hatzius, chief economist and head of research at Goldman Sachs.
Goldman now expects the U.S. central bank to keep its target rate unchanged in the 4.5%-4.75% range, compared with its earlier expectation of a 25 basis points hike. Peer Citigroup sees a smaller 25 bps hike, down from a 50 bps hike forecast earlier in the month.
Money markets have increasingly added bets toward a pause. Odds were almost equally split between a pause and a 25 bps hike, as of 10:54 a.m. ET.
Barclays has changed its view multiple times. The brokerage started with a 50 bps hike and then changed to a pause following the collapse of SVB Financial. It now sees a 25 basis points hike.
Nomura expects a 25 bps rate cut at the end of the Fed's two-day meeting on Wednesday.
Terminal rate forecasts have also swiftly come down. While some banks still see it approaching 6%, money markets now see it peaking at 4.8% by May. Meanwhile, the European Central Bank last week pressed ahead with a 50 bps hike despite calls for a smaller cut or a pause in the face of stresses in the banking sector. Major investment banks now expect the ECB to deliver a 25 bps hike in May.
The Fed has hiked rates by 450 bps since last March in its fight against inflation.
But even with inflation having seemingly peaked it remains well above the Fed's 2% target. Consumer price inflation stood at a year-over-year annual rate of 6% in February.
That, along with evidence of a still tight labor market forms the basis for expectations of a rate hike this week.
(Reporting by Susan Mathew in Bengaluru; Editing by Sriraj Kalluvila)
