5 mins read . 09 May 2023
Recently, interest-rate strategists from Goldman Sachs formed a consensus with those at Barclays. In fact, both have advised their customers to position themselves for no substantial interest rate cuts by the US Federal Reserve, at least in 2023. This is in sync with what the Fed has stated in the statement earlier this month. Fed has made it clear in the statement that while a pause in rates was possible, any rate cuts in 2023 were totally ruled out. This is in contrast to the market view. The CME Fedwatch, which uses Fed futures price to calculate probabilities of rate hikes, has pegged rate cuts of 100 bps in 2023 and another 100 bps in 2024. Fed has some company in that, both Goldman Sachs and Barclays are of the view that rates will not be cut in 2023.
On May 3, Fed Chair Jerome Powell made a rather cryptic statement on rates. He said that “We are closer, or maybe even at the peak of the rate cycle.” However, even after raising Fed rates by a full 500 bps from the COVID lows, Powell had refused to speculate on the terminal rates, simply indicating that they would be data driven. However, experts are now increasingly and openly questioning the wisdom of rate hikes in an economy where inflation has considerably tapered and growth for first quarter GDP has fallen to 1.1%. To add to these problems, the banking crisis is also making the situation more complicated as it is not estimated that the banking crisis could spread among a plethora of mid-sized banks and have an impact on growth drivers.
Now, even Powell admits that while job gains have been robust, that consumption spending was also being hit. Housing investments have been at a low for a very long time. Powell also now feels that further tightening could only lead to an economic slowdown, which could result in further joblessness. The US wants to abate the risk of a recession at this point.
Last month, economists at Goldman Sachs had estimated that the Fed would finally hit the pause button on monetary tightening by June 2023. This forecast was backed by hints that banks were already reining in lending, post the collapse of Silicon Valley Bank. However, institutions like Bank of America, at that time, had predicted further interest rate hikes during the year since inflation was still soaring at double the target value.
The latest thinking from Goldman Sachs is that in 2023, at least, rate cuts were totally ruled out. This is in contrast to what the CME Fedwatch is suggesting. In fact, Goldman has even kept the possibility of more rate hikes likely, while maintaining that the US Fed was close to peak rates. Historically, when the Fed carried out a series of hikes, followed by their maintaining that no further changes will be made, the most ubiquitous ramification over the next 6 months is an “on-hold” Fed.
Furthermore, the recent futures positioning data from the Commodity Futures Trading Commission suggests that hedge funds expect the Fed to keep rates higher for longer. That means, current rates my stay through 2023. The inflation gauges for April are set to be released this week, and the positioning around policy pricing will be determined on the results of the datasets. But, hawkishness may continue for now.
Content Source: Financial Express