(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.
Recent U.S. data, including an uptick in personal consumption expenditure – the Fed’s preferred gauge of inflation, has prompted some major investment banks and brokerages to factor in the possibility of a 50-basis-point rate hike in March versus 25 bps expected earlier.
Money market traders still see an 80% chance of the Fed delivering a smaller 25-basis-point rate hike in March.
Banks have flagged the possibility of the Fed’s peak rate rising as high as 6%, above the 5.42% by September that markets are currently pricing in.
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 50bps”
Barclays 25 5.40% Sees “good chance” of 50bp 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% Says Fed may have to hike as much as
6% to rein in inflation; expects
U.S. economy to tip into recession
in Q3 2023
Expects Fed to continue
Nordea 25 5.75% – 6% hiking by 25bp until the September
meeting
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 50bps hike as
Stanley unlikely; expects first rate cut in
March 2024, later than December 2023
it had previously expected
Deutsche 25 5.60% Bar for return to a 50bp
Bank pace is high, expects first Fed rate
cut in Q1 2024; Sees moderate
recession starting Q4 2023
Goldman 25 5.25% – 5.5% Expects core PCE inflation to fall
Sachs to 3.3% in December – higher than
2.9% forecast earlier; core PCE
currently stands at 4.7%
5% Sees only 20% chance of
J.P.Morga 25 – 5.25% 50 bps hike in March, expects
n another hike in May with the “chance
of June”;
expects first rate cut
in Q4, sees near equal chance of
early 2024; says trend payrolls
sub-100k is likely a prerequisite
for the Fed to pause
(Compiled by the Broker Research team in Bengaluru; Editing by Saumyadeb Chakrabarty)
