[RPT]03/22/23
ING:
Nonetheless, the Fed appears quietly confident the economy won't be heavily disrupted by recent banking sector woes. It argues that the “US banking system is sound and resilient” so their fourth quarter year-on-year GDP forecast for 2023 has only been cut from 0.5% to 0.4% while 2024 is now 1.2% versus 1.6% expected three months ago. The unemployment and inflation expectations are little changed. Moreover, the Fed are now looking for only 75bp of rate cuts in 2024 rather than 100bp of cuts that it had projected back in December.
Our concern was that this has been the most aggressive monetary policy tightening cycle for 40 years and by going harder and faster into restrictive territory you naturally have less control over the outcome.
We agree that we could get one final 25bp hike in May, leaving the Fed funds range at 5-5.25%. But higher borrowing costs and reduced access to credit mean a greater chance of a hard landing for the economy
ABN AMRO:
We do not see the Federal Reserve cutting interest rates until December 2023 due to greater resilience in labor market demand and inflation, this view is revised from a prior expectation of a rate cut in September
Expect the U.S. central bank to raise interest rates by 25 basis points one final time in May before pausing the rate rises
Given the recent bad news on inflation, and with financial conditions continuing to ease significantly in recent days, we now expect one further 25bps hike by the Fed, taking the fed funds rate to 5.00-5.25%. We see the policy rate returning to a neutral level of around 2.5% in early 2025
BofA:
Excess tightening in bank lending standards to substitute for policy rate firming. The outcome of the March Federal Open Market Committee (FOMC) meeting was broadly as we expected. The Fed lifted its policy rate by 25bp. That said, the Fed has taken on board some amount of tightening in credit standards and terms as a result of the recent stresses that emerged from several regional banks. While Chair Powell said that the true extent of this tightening is unknown and dependent on how well Fed actions to date reduce spillover risks, he said that most committee members factored this effect into their forecasts.
Hence, most participants see appropriate policy as calling for a lower terminal rate than Fed communications were guiding markets to just a few weeks ago. This was reflected in the statement by saying 'some additional policy rate firming may be appropriate' versus prior language that said "ongoing" rate hikes may be needed. We agree that some amount of unexpected tightening in bank lending standards may be forthcoming.
The US economy may see tighter lending standards than what could be explained by macroeconomic fundamentals. If so, our view is that it could indeed substitute for further rate hikes (see the report Estimating downside risk from a 21 March 2023). Hence, we no longer expect a 25bp rate hike in June and now foresee a terminal target funds rate of 5.0-5.25% reached in May.
Should the stresses in the financial system be reduced in short order, we cannot rule out that stronger macro data will lead the Fed to put in additional rate hikes beyond May, but for now, we think that risks are in the direction of an earlier end to the tightening cycle.
UBS:
The FOMC statement gives a dovish tone to the tote hike. Yes, fed funds was raised and yes, past data has been stronger than expected, but that's now offset by the anticipated tightening of credit conditions. That sounds like there is one more 25bp hike to come in May and then the Fed will pause.
The statement upgrades the employment section to "job gains have picked up..." from February's 'robust". But that Is Immediately mitigated In the next paragraph which is the forward-looking comment about financial conditions.
BMO:
The guidance didn’t specify that further firming would be via rate hikes, so it seems that continued quantitative tightening could satisfy this policy signal. The word “firming” could also mean simply allowing past rate hikes to come home to roost. In effect, the Fed has opened the door to a potential pause on May 3
March rate hike lifts the fed funds target range to 4.75%-to-5.00% and brings cumulative tightening to 475 bps. The former is the highest since 2007 (just before the Global Financial Crisis and Great Recession); the latter is the largest since the Fed began targeting fed funds in the 1980s. And we still judge the Fed could have one more quarter-point move up its sleeve, before pausing for the remainder of the year in the wake of an unfolding mild recession and further disinflation. This economic scenario is reinforced by the growth dampening impact of banking sector stress and tighter financial conditions.
TD Securities:
This was one of the most contentious decisions the Fed has had to make. When inflation was its singular focus over the last year, raising rates was the only option. But now that the stability of the financial system has been brought to the forefront, the Fed is having to toe a fine line. By raising rates, while focusing the statement on the tail risks, it is acknowledging the flow through of financial market stress on the broader economy.
The changes in the Fed's economic projections were for weaker growth over the next two years and higher inflation. In contrast to what was signaled a short time ago, the median "dot" for the end of this year was unchanged, suggesting that the downdraft from tighter credit conditions is expected to weigh on economic momentum enough to negate the need for the further rate hikes discussed only two short weeks ago.
Chair Powell is ready to speak, and we expect a flurry of questions, with investors eager to know how the Fed expects to manage its policy rate with so many crosscurrents challenging the outlook. Even though the Fed's projections point to another forthcoming rate hike, markets are getting ready for cuts to start by this summer. That would be an incredibly quick turnaround should the Fed hike again in May. This aggressive pricing has bond yields falling again. Let's see if Powell tries to lean against markets once more.
Wells Fargo:
We anticipate that the Committee will increase the target range for the federal funds rate by another 25 bps at its next meeting on May 3, which we believe will be the last rate hike in this cycle
We think the FOMC will refrain from hiking the fed funds rate at the June 14 meeting in order to assess the effects that tighter monetary policy and credit conditions are having on the economy. That said, we would judge the risks to our fed funds forecast to be skewed to the upside. That is, we judge the probability of another 25 bps rate hike at the June 14 meeting to be higher than a pause at the May 3 meeting, assuming that authorities are successful in stabilizing the recent turmoil.
We expect the Committee will remain on hold for most of the rest of 2023 as economic activity weakens and inflation recedes further. If our forecast of a modest recession beginning in the third quarter comes to pass, then we look for the FOMC to cut rates significantly next year.
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