The higher-than-expected U.S. inflation in May had caused the fluctuation for the risk assets such as the stock markets in fear of a much aggressive interest rate hike by 75 basis points instead of prior anticipation of 50 basis points.
Prior to the announcement of the U.S. inflation data in May, the market widely expected the central bank to increase interest rate by 50bp in the meeting this week and another 50bp in the third quarter before slowing down to 25bp in each meeting in the fourth quarter.
However, the rise in cost of living in May led to a revision of Fed’s fund rate by some brokers, upgrading from a 50bp hike to 75bp hike.
Goldman Sachs had revised its Fed forecast to include 75bp hikes in June and July, citing an article in Wall Street Journal that said the Fed officials are likely “to consider surprising markets with a larger-than-expected 0.75-percentage-point interest rate increase at their meeting this week.”
After the revision for two 75bp hikes in June and July, Goldman stated that this would quickly reset the level of the funds rate at 2.25-2.5%, the FOMC’s median estimate of the neutral rate. The firm expected a 50bp hike in September and 25bp hikes in November and December, for an unchanged terminal rate of 3.25-3.50%.
Goldman Sachs now expected the median dot to show 3.25-3.50% at the end of 2022, while expecting the median dot to show two further hikes in 2023 to 3.75-4.00%, followed by one cut in 2024 to 3.5-3.75%.
Following Goldman Sachs’ revision, Deutsche Bank, Jefferies Group, Nomura and JPMorgan had also upgraded their Fed funds rate forecast to a 75bp in the meeting this week.