Strategists Revise Forecasts After Fed's 'Hawkish 75bp Hike'

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By Senad Karaahmetovic 

The Federal Reserve raised its key interest rate by 0.75 percentage points yesterday to mark the third consecutive rate hike of that size. Yesterday’s move has pushed the benchmark rate to a range of 3% to 3.25%.

More importantly, the Federal Fed’s “dot plot” suggests more aggressive tightening ahead with interest rates seen going all the way to 4.6% in 2023.

"Reducing inflation is likely to require a sustained period of below trend growth,” Federal Reserve Chair Jerome Powell said. “And, it will very likely [mean] some softening of labor market conditions."

"Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the long run. We will keep at it until we’re confident the job is done."

In response to Fed’s statement and Chair Powell’s press conference, the yield on the 2-year Treasury hit the highest level since October 2007. Understandably, the U.S. equities fell sharply on another spike higher in yields with the S&P 500 closing the day over 1.7% lower.

Here’s what the top strategists are saying:

Goldman Sachs’ Jan Hatzius: “We had expected a nod toward a slower pace in November and are revising our forecast for rate hikes to 75bp in November, 50bp in December, and 25bp in February, for a peak funds rate of 4.5-4.75% (vs. 4-4.25% previously).”

Citi’s Andrew Hollenhorst: “We expected the Fed to deliver a hawkish message through higher “dots” and have been emphasizing upside risk to Fed policy rates. Still, the Fed managed to exceed even our hawkish expectations... We are adding 25bp of cumulative hikes to our projections and now expect a 75bp hike in November, 50bp in December, and 25bp in February for a terminal rate of 4.5-4.75%.”

Bank of America’s Michael Gapen: “We revise our outlook higher for the target range for the federal funds rate in the current tightening cycle. We now expect the Fed to raise its policy rate by 75bp in November and 50bp in December, followed by two 25bp rate hikes in February and March of next year.”

Morgan Stanley’s Ellen Zentner: “We think inflation persistence will keep the Fed at peak for most of next year, challenging the market's assumption of an earlier start to cuts. Monetary policy works with a lag and the speed at which the Fed is moving is a risk, but the Fed seems willing to take it. The higher the peak the Fed aims for, the greater the risk of recession. We are already moving through sustained below-potential GDP growth. Now, we would need to see job gains slow materially to take pressure off the pace of policy tightening.”

HSBC’s Ryan Wang: “We change our profile for the federal funds rate, now anticipating another 75bp in November (50bp previously), 50bp in December (25bp previously), and a final 25bp hike in February 2023. This would take the federal funds target range to 4.50-4.75% in February, 50bp higher than our previous forecast for a peak of 4.00-4.25%. The risks for policy rates may still be skewed to the upside given sticky, elevated inflation.”