Thankfully, there is at least one area of U.S. society where people are still allowed to disagree, and that's on Wall Street, where there is a clear difference of opinion on what we can expect the Fed to do this year regarding raising interest rates to fight inflation. What's surprising is how widely divergent they are.
Let's start with the most aggressive, or hawkish, prediction. That belongs to Bank of America.
"Following the continued hawkish pivot at the January FOMC meeting, we expect the Fed to start tightening at the March 2022 meeting, raising rates by 25 basis points at every remaining meeting this year for a total of seven hikes, and in every quarter of 2023 for a total of four hikes," BofA economists said. That would put the fed funds target rate at a range of 1.75% to 2% by the end of this year and 2.75% to 3.00% by the end of next year when the bank expects the rate-raising cycle to end.
"The Fed has all but admitted that it is seriously behind the curve," the BofA research note added. "When you are behind in a race, you don't take water breaks," it said, explaining its aggressive forecast.
Currently, of course, the Fed funds rate range is still at 0% to 0.25%. The markets are pricing in a "terminal" rate of around 1.75%, or about 100 bps lower than BofA's forecast.
The BofA team also expects the Fed to start reducing the size of its $9 trillion balance sheet in May.
Nearly as hawkish is Goldman Sachs, which is now forecasting five rate rises this year, up from its earlier prediction of four, followed by three more next year, with balance sheet reduction to begin in June.
The Fed's next monetary policy meeting isn't scheduled until the middle of March.
Other big Wall Street firms have come out with some hawkish forecasts. BNP Paribas Bank now is calling for six quarter-point rate hikes, up from its earlier prediction of four, which will leave the fed funds target range at 2.25%-2.50% at the end of 2023. JP Morgan Chase and Deutsche Bank are calling for five rate hikes this year.
I have some issues with these forecasts, the BofA one in particular. A rate hike regimen like that might—meaning may—put the clamps on inflation. But it might also stifle economic growth, something I can't see the Fed interested in tempting—quite the opposite. The Fed's dual mandate still calls for keeping inflation in check while promoting maximum employment; one of those would have to give if the Fed raises rates as aggressively as these predictions call for.
But "water breaks"? Are they serious?
BofA is certainly correct that the Fed has been behind the curve, but the Fed has shown no sense of urgency to take aggressive action, unlike its counterpart at the Bank of England, which has already started to raise rates. Despite inflation that has been mounting for the better part of a year, the Fed has seen fit to do nothing except talk about it. Fed chair Jerome Powell told Congress in late November that it was "probably a good time to retire" the word transitory to describe rising inflation but still has not initiated any actual moves. Rather, the Fed has indicated several times that it will likely raise rates starting at the March meeting, although that's still a maybe. The Fed remains on the sidelines; it's not even in the game yet, and we're worried about it taking a "water break"?
However, not everyone on the Street sees Powell suddenly transforming himself from a dove into a hawk.
BlackRock, for example, which has $10 trillion of assets under management riding on its forecast, believes "central banks are talking tough but ultimately will acknowledge that fighting inflation by aggressively hiking will come at too high a cost to growth. This is why we see the eventual policy response as muted." As a result, it's still bullish on equities, which it believes will continue to do well in a "benign" rate environment.
Carlyle Group co-founder David Rubenstein also bucked the hawkish talk. He told CNBC this week that the Fed will probably raise rates by 25 basis points in March but won't follow up with more at every subsequent meeting. Inflation is likely to subside faster than the current consensus believes.
The Fed has shown it can act very quickly and aggressively to face down economic crises, such as the 2008 global financial crisis and the 2020 pandemic shutdown, when it lowered interest rates to zero and flooded the markets with cheap money. But being accommodative is a lot easier politically than having to remove that accommodation even when it's no longer needed. It's a lot more fun to keep pouring the drinks than to have to cut people off because you think they've had enough.
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INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.