Citi Sees Half-Point March Rate Hike On Hawkish Powell Remarks

(Bloomberg) -- Citigroup Inc. economists see the Federal Reserve raising its benchmark lending rate by 50 basis points at the March meeting, joining Goldman Sachs Group Inc. in lifting their forecast after Chair Jerome Powell's hawkish comments on Capitol Hill Tuesday. 

They increased the estimate from 25 basis points, and also lifted their forecast for peak rates to a range of 5.5% to 5.75%, they said in a note to clients Wednesday.   

Powell told lawmakers the Fed is likely to lift interest rates higher and potentially more quickly than previously anticipated with inflation persisting, an unexpectedly aggressive posture following last month's step down in the pace of hikes.

The Federal Open Market Committee meets March 21-22, when officials will update quarterly forecasts that in December estimated rates would peak in a 5%-5.25% range, according to the median projection. But data in January came in hotter than expected, and Powell warned this suggests the rate peak is likely higher than previously thought. He also said officials would be ready to increase the pace of rate increases if the incoming data warrant.

“Had he indicated a preference for 25 basis points, but maintained the option of 50 basis points — as we expected — the market might have added a few basis points,” economists including Andrew Hollenhorst, Veronica Clark and Gisela Hoxha wrote. “But Powell was more hawkish, endorsing the idea that a 50 basis-point hike will be delivered if the ‘totality' of the data suggest the larger sized hike is appropriate.” 

Noting that the market is pricing in close to 40 basis points of increase at the upcoming meeting, the economists said “this effectively lowers the bar for a larger hike.”

“The risk is to an even-higher policy rate should 25 basis-point hikes continue through July or beyond, or if data is so strong the committee sticks to a 50 basis-point hike pace for longer,” they said. 

The Citigroup economists see the Fed's preferred inflation measure — the personal consumption expenditures index — rising in a range of 4.5% to 5% for the next five months. 

Given that, “Fed officials might feel a terminal rate in the high 5% range is reasonable as this would imply a significant positive real policy rate,” they said. 

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