Factbox-Fed rate watch: Wall Street banks see longer hike cycle, higher rates

(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 a near 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 approaching 6% this year, above the 5.49% by September that markets are currently pricing in. The Fed funds rate is currently at 4.5% – 4.75%.

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 50 bps (in March)”

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% to get inflation back to

target”

Expects U.S. economy to

tip into recession in Q3 2023

“Risks skewed towards hikes

Citi 25 5.25-5.50% continuing into the second half of

2023″

Nordea 25 5.75% – 6% Expects Fed to continue hiking by 25

bps until the September meeting

Anticipates Fed will

Wells 25 5.25% – 5.5% finish raising rates by mid-year

Fargo 2023; does not expect rate cuts in

2023

Adds expectation for a

UBS 25 5.25% – 5.5% 25 bps hike in June, following a

similar move in May;

“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.”

Goldman 25 5.25% – 5.5% Sees upside risks to terminal rate

Sachs forecast;Expects core PCE inflation

to fall to 3.3% in December – higher

than 2.9% forecast earlier

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 50 bps hike as

Stanley unlikely; expects first rate cut in

March 2024

Deutsche 25 5.60% Bar for return to a 50 bps pace is

Bank 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”;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 and Sweta Singh)