Goldman Sachs Expects One Last Fed Hike in May But Warns About High Rates For Longer

Goldman Sachs U.S. Economist David Mericle expects the Federal Reserve will raise rates by 25 basis points for one last time in May and keep them sticky high for a long time.

In a note published last Friday, Goldman Sachs anticipated interest rates would remain unchanged in June, but the Federal Reserve would maintain a hawkish bias. Much depends on the extent to which banking stress affects the economy.

Mericle said the Fed's Beige Book's remarks on tightened lending standards legitimize fears of a pause in June.

Goldman Sachs currently forecasts 10-year Treasury yields to rise to 3.9% at the end of 2023, and the S&P 500 index, which is tracked by the SPDR S&P 500 ETF Trust SPY, to decline 3% over the next 12 months.

How The FOMC Statement Could Be Tweaked: According to the analyst, the FOMC might borrow language from a statement at a similar juncture in a prior cycle and say something like, "The Committee anticipates that the stance of monetary policy will most likely be sufficiently restrictive to return inflation to 2 percent over time but will closely monitor incoming information and assess the implications for monetary policy."

Goldman's Fed future rates are higher than market pricing due to their below-consensus recession likelihood and their conviction that the rate cut threshold will be higher than investors currently expect.

Still, Goldman Sachs believed tighter credit could exceed the central estimate, especially if it hits real estate, manufacturing, and small businesses, which are most dependent on small and midsize banks.

Goldman Sachs Sees Below-Consensus US Recession Probability: Goldman Sachs predicted a lower likelihood of a U.S. recession than the consensus, 30% as opposed to 65%.

According to the expert, the Fed will wait until there is a growth scare before lowering rates, rather than cutting rates now since inflation has begun to fall. Core PCE inflation is predicted to decline to 3.3% by December 2023, according to Goldman Sachs' economic forecasts, on the back of continued supply chain improvements, a drop in shelter inflation and slower salary growth. 

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