Taking Powell At His Word: Wall Street Analysts Foresee Further Rate Hikes, US GDP Growth

Sell-side analysts on Wall Street are now revising their expectations for interest rate hikes by the Federal Reserve in 2023.

Leading the way is Michael Gapen, chief U.S. economist at Bank of America, and his team, who now predict two 25 basis point rate hikes, resulting in a terminal range of 5.50% to 5.75%. The second rate hike is anticipated to occur either in September or at the November 1 FOMC meeting.

Gapen viewed that the comments made by Federal Reserve Chair Jerome Powell last week at Congressional committee hearings indicated the 5.50%-5.75% range as a credible estimate of interest rates at the end of the year, as the Fed Chair rejected the idea of a “pause.”

Is Powell Now Acting As Volcker?

Bank of America compared Powell’s unwavering commitment to achieving a 2% inflation target over time, even at the risk of a potential recession, to that of former chairman Paul Volcker who also prioritized low and stable inflation.

Specifically, Gapen noted that Powell’s hints suggested the committee would react more forcefully to whichever variable was furthest from the target, which at the current phase is inflation. 

“It’s not a question because the labor market is obviously extraordinarily strong, and we’re very far from our inflation target,” Jerome Powell said last week. 

Read also: This Day In Market History: Paul Volcker Takes Over As Fed Chair

Bank of America Now Sees Upward Revisions To U.S. GDP

Bank of America, which previously had a pessimistic view of the economy, had repeatedly expressed concerns about the possibility of a recession in the second half of the year.

However, BofA analysts have now recognized the economy’s resilience, prompting them to anticipate significant upward revisions to the U.S. GDP.

The third estimate of the second quarter GDP is expected to be revised significantly higher to 1.8% quarter-on-quarter seasonally adjusted annual rate (q/q saar). Positive adjustments to both residential and non-residential construction spending, as well as annual revisions to trade data, are primarily driving these revisions.

Read now: US Supply Chain, Manufacturing Data Hints At Impending Slowdown: Stocks Plummet, Safe Havens Rally As Uncertainties Rise

Photo: Federal Reserve