A number of Wall Street banks raised expectations this week for the Federal Reserve’s next move.
Economists at Bank of America, Goldman Sachs and Nomura now project policymakers will achieve a 75 basis point rate hike at their Sept. 20-21 policy meeting, compared with earlier forecasts for a hike by half a percentage point.
After remarks by Fed Chairman Jerome Powell at the Cato Institute’s 40th Annual Monetary Conference on Thursday, markets priced in about 71 basis points of rate hikes in September, based on federal funds futures, or above a 90% chance of 75 basis points increase in interest rates, Bank of America noted.
“In our view, unchanged guidance on when the pace of rate hikes may slow suggests that Chairman Powell and the Fed are comfortable with current market rates,” said Bank of America chief economist Michael Gapen , in a note to clients.
“We strongly believe that history suggests that the Fed is willing to surprise financial markets when it comes to rate cuts but not when it comes to rate hikes.”
The case for a 75 basis point rate hike began to permeate Wall Street on Wednesday after a Wall Street Journal report suggested the Fed would likely raise rates by that amount at its next policy meeting.
In addition to Fed Chairman Powell’s comments this week, Fed officials, from Vice Chairman Lael Brainard to Fed Governor Christopher Waller and St. Louis, James Bullard, suggested that the central bank will likely maintain the recent pace of interest rate increases.
At both its June and July policy meetings, the Fed raised interest rates by 0.75%, the biggest move since 1994.
Bank of America countered expectations for a 25 basis point rate hike at the Fed’s January policy meeting and then raised its final target range for the Fed Funds rate by 50 basis points.
BofA’s updated estimates call for a 75 basis point hike in September, 50 basis point hike in November and 25 basis point hikes each in December and January, bringing the final target range for the federal funds rate to 4-4.25%.
Goldman Sachs boosted its forecasts for the Fed’s next move in a note this week, with the firm now expecting a rate hike of 75 basis points this month and 50 basis points in November. Goldman had previously expected increases at those meetings of 50 and 25 basis points, respectively.
“Fed officials have sounded husky recently and seemed to suggest that progress toward curbing inflation has not been as even or as fast as they would like,” Goldman analysts led by economist Jan Hatzius said in a note late Wednesday.
Nomura also sees stronger hikes ahead, raising its call to 75 basis points this month and half a percentage point in November, reflecting a 25 basis point increase on each of its previous forecasts.
“Comments from FOMC participants in recent weeks suggest a greater urgency to raise interest rates somewhat faster and to a higher overall level in order to more forcefully address persistent above-target inflation,” Nomura economists led by Aichi Amemiya said. .
Expectations for higher interest rates come as data show the services sector continues to grow and the labor market remains strong — both indicators for Fed officials that the economy can handle more aggressive monetary tightening.
Initial jobless claims fell to 222,000 in the week ended Sept. 3, the lowest since May, and the Labor Department’s monthly jobs report showed payrolls rose by 315,000 jobs in August.
Meanwhile, the services sector strengthened for a second straight month in August, with the Institute for Supply Management’s non-manufacturing PMI rising to 56.9 last month from 56.7 in July.
Investors are also looking ahead to the release of next week’s all-important Consumer Price Index for August, which is expected to show another moderation in annual inflation.
Economists polled by Bloomberg expected prices to rise 8.1 percent from last month, up from 8.5 percent in July. The reading could change expectations about whether the Fed will choose a 50- or 75-basis-point hike, although a media blackout period for the Fed ahead of this month’s FOMC meeting could make communication difficult. of changed expectations challenge for the Fed.
In an interview on Yahoo Finance Live on Friday, Morgan Stanley chief economist Seth Carpenter said there is a “one-way risk” to the US economy.
If the labor market and other aspects of the economic picture turn out to be better than expected, Federal Reserve officials may be motivated to increase their hikes and put the economy on a low growth path.
Alternatively, if the Fed slows the pace of rate hikes in response to economic conditions, the economy will have started to slow anyway.
Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc
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