BofA, Goldman Stick to Fed Views Even as Traders Trim Bets

(Bloomberg) -- Wall Street's biggest banks are sticking by their calls for as many as seven Federal Reserve interest-rate hikes this year even as traders and some of their peers ratchet back expectations.

Bank of America Corp. and Goldman Sachs Group Inc. still predict the U.S. central bank will raise its benchmark to 2% by year-end from the current range of zero to 0.25%, while JPMorgan Chase & Co. sees the rate reaching 2% in early 2023. Their main argument: surging inflation will compel the Fed to act.

Sure, the Russian invasion of Ukraine and the sanctions weighing on the country may curb global growth, but they will also fuel further consumer-prices gains by pushing up raw material prices even more.

“The underlying rationale for normalization hasn't yet changed,” said Praveen Korapathy, a strategist at Goldman Sachs in New York. “If all we get is a small hit to growth and still elevated inflation, it makes the Fed's trade-off worse, but I don't think it would get them to sit on their hands.”

Rates traders see things differently. They have slashed the odds of Fed tightening in recent days as the sanctions on Russia have weighed on the global-growth outlook. Money markets have pared pricing for a rate hike in March to a quarter point from a half point prior to the invasion, and they now predict the central bank's key rate will peak at 1.7%, well below the Fed's long-term projection of 2.5%.

TD Securities Inc. is among those revising its view. The company now sees a smaller Fed hike this month than it envisaged earlier, and has shifted some of its anticipated rate increases to next year. The conflict in Ukraine has also persuaded strategists at BlackRock Investment Institute that the Fed will tread more lightly, motivating their tilt in favor of equities over credit.

“We now know what we are dealing with: a protracted stand-off between Russia and the West. We also think it has reduced the risk of central banks slamming the brakes to contain inflation,” said a BII client note published Tuesday.

Lowering Bets

The latest rally in Treasuries, which saw five-year yields slide by 27 basis points over the past two days, has upended some hefty bearish bets from rates to credit markets. NatWest Markets Plc said Wednesday it was stopped out of “core strategic investment stances,” and exited money-market positions that were premised on a steeper path of hikes.

“Given the Fed's twin-mandate of goals of maximum employment and price stability -- most market participants have lowered their expectations of the cumulative number of interest rate hikes -- not just for year 2022, but beyond,” John Herrmann and Jan Nevruzi wrote in a research note published Tuesday.