Top investment banks scramble to change Federal Reserve rate calls

Strategists at the world’s top investment banks scrambled to change their Federal Reserve rate calls on Thursday after policy makers emphasized at a policy meeting that it would tighten policy to clamp down on inflation.

The Federal Reserve on Wednesday said it was likely to hike interest rates in March and reaffirmed plans to end its bond purchases that month, surprising investors who had already braced for as many as four rate hikes until the end of the year.

Deutsche Bank strategists now expect policy makers to raise interest rates at each meeting from March to June and then revert to a quarterly tightening cycle from September totalling five rate hikes this year.

Analysts at Nomura, Japan’s biggest brokerage and investment bank, said they expect the U.S. Federal Reserve to hike its benchmark rate by 50 basis points in March.

Analysts at TD Securities, meanwhile, said they now expect four rate increases of 25 basis points, rather than three. They are also looking for the Fed to begin reducing its nearly US$9-trillion balance sheet in May, compared to a previous forecast calling for the central bank to do so in September.

At the conclusion of Wednesday’s meeting, Fed chairman Jerome Powell said a decision would be made in coming months on when to start shrinking the central bank’s government bonds and mortgage-backed securities.

BNP Paribas expects as much as six 25 bps hikes in 2022 from four earlier, and expects the fed funds target range at 2.25 per cent to 2.50 per cent at end-2023, 25 bps higher than a previous forecast.

“Our new base case for six hikes this year poses challenges to our bullish outlook for US equities,” the French bank’s strategists said in a note.

Mr. Powell did not rule out such a move when asked about it after Wednesday’s Fed meeting.

“He repeatedly appeared to differentiate the upcoming hiking cycle from the last time the Fed normalized its policy rate at a roughly quarterly pace,” Nomura’s analysts said in a note.

“We now expect a 50 bp rate hike at the March [Fed] meeting, followed by three consecutive 25 bp hikes in May, June and July,” they said, adding that another 25 bp hike was expected in December.

Fed funds futures, which track short-term rate expectations, are now pricing nearly five rate increases of 25 bps each this year, up from four expected hikes before Mr. Powell’s news conference.

Some major investment banks like Goldman Sachs and HSBC are sticking with their rate forecasts of four and three rate hikes respectively, betting the recent sell-off in markets will lead to a tightening in financial conditions.