(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 (LON:BARC) 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