Two major investment banks on Wall Street stated that they anticipate the Federal Reserve will resume hiking interest rates as soon as July, departing from initial market reactions to the Fed Chair Jerome Powell’s press conference.
Following the Fed’s decision to pause at its June meeting, Goldman Sachs economist David Mericle has maintained his expectation of another hike in July. The expert and his team believe the fed funds rate will peak at 5.25%-5.5%, with upside risks for another boost in November or October.
Bank of America U.S. economist, Michael Gapen was even more hawkish than his colleague, anticipating two more rate hikes, one in July and another in September or October.
On Wednesday, the Fed decided to pause rate hikes in order to better allow the FOMC to examine further the incoming economic data and its implications for monetary policy.
Goldman Sachs Sees Another Hike In July
According to Mericle, the combination of the hawkish surprise in the dots and the hint at an every-other-meeting pace raised confidence that the FOMC will give another raise in July. This prediction is distinct from the fact that core inflation is expected to decline sharply next month as used vehicle prices flip from a positive to a negative trend.
“We are not forecasting any hikes beyond July, but we think the hint at an every-other-meeting pace means that the FOMC is more likely to consider a possible second hike in November than in September,” the analyst wrote.
Bank of America Forecasts Two Additional Rate Hikes
“The Fed may be prepared to take policy rate decisions on an every-other-meeting basis,” said Gapen.
The analyst now expects the Fed to deliver a 0.25% hike in July and an additional 0.25% hike in September to achieve a terminal rate of 5.5%-5.75%.
As the Fed continues to tighten, investors “should be careful with outright long duration position” in Treasuries, Gapen said. Bank of America remains modestly bullish on the U.S. dollar in the short-term, as the Fed’s hiking cycle goes on.
An ETF tracking long-duration Treasuries is the iShares 20 Plus Year Treasury Bond ETF TLT, while an ETF offering investors exposure to the performance of the U.S. dollar index is the Invesco DB USD Index Bullish Fund ETF UUP.
Fed Interest Rates: What Is The Market Currently Pricing In?
According to the most recent CME Group FedWatch, Fed futures imply a 64.5% implied chance of a rate hike in July.
A back-to-back hike in September is considered as highly unlikely by market participants, with only a 9% chance. The first fed rate cut is expected to occur in the first quarter of 2024.
Table: Latest Probabilities of FOMC Rate Moves
| FOMC MEETING DATE |
4.00-425 | 4.25-450 | 4.50-4.75 | 4.75-5.00 | 5.00-5.25 (current) |
5.25-5.50 | 5.50-5.75 |
|---|---|---|---|---|---|---|---|
| 07/26/2023 | 35.5% | 64.5% | |||||
| 09/20/2023 | 30.5% | 60.4% | 9.0% | ||||
| 11/01/2023 | 2.0% | 32.5% | 57.0% | 8.4% | |||
| 12/13/2023 | 11.7% | 40.3% | 41.6% | 5.8% | |||
| 01/31/2024 | 0.3% | 6.6% | 27.0% | 41.0% | 22.4% | 2.7% | |
| 03/20/2024 | 0.2% | 4.7% | 20.9% | 36.8% | 28.0% | 8.6% | 0.8% |
Read Also: ECB Hikes 0.25%, Pushing Rates To 22-Year Highs: Lagarde Says ‘We Have More Ground To Cover’