Wall Street digests Powell's comments on banks, rate cuts and inflation

U.S. futures trade modestly higher in Thursday’s premarket session as investors digest Fed Chair Powell’s comments about the central bank’s future actions.

The U.S. central bank hiked its key interest rate by 25 basis points to a range of 4.75% to 5% as widely expected, but stocks fell about 2.5% off their session highs after Powell reiterated that the inflation fight isn’t over.

“The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” Powell told journalists.

Moreover, his comments that “rate cuts are not in our base case” for 2023 also triggered a selloff in stocks. Another reason why shares rotated lower yesterday is Treasury Secretary Yellen’s comments that the authorities are not considering blanket insurance for all bank deposits.

According to Investing.com’s Fed Rate Monitoring Tool, traders are assigning a 56% possibility that the Fed would hike by 25 basis points in May.

The updated ‘dot plot’ shows interest rates peaking at 5.1% at the end of 2023. The media for 2024 now sees rates at 4.3%, which translates into 75bps rate cuts next year instead of the 100bps indicated in December.

What Fed will do next?

Here’s how top Wall Street economists saw the FOMC statement and Powell’s comments.

Citi: “While we also expect a drag on growth from tightening credit conditions, inflation data in particular over the next few months should remain uncomfortably strong, making it difficult for the Fed to pause rate hikes. We continue to expect a terminal rate of 5.50-5.75%, although like the Fed will remain highly data dependent.”

JPMorgan: “We continue to look for one more 25bp hike in May and an extended pause before the Fed eases in 2Q24.”

UBS: “We think we saw a more cautious central bank than the one that front-loaded rate hikes in 2022. As a result, we are going to lower our previous projection of the terminal rate by 25 bps and assume no June rate hike, due to the FOMC's caution and due to the weakening economy and softening inflation data we project. In other words, we assume one more rate hike at the May FOMC meeting, by 25 bps.”

BofA: “We agree that some amount of unexpected tightening in bank lending standards may be forthcoming. In other words, the US economy may see tighter lending standards than what could be explained by macroeconomic fundamentals. If so, our view is that it could indeed substitute for further rate hikes. Hence, we no longer expect a 25bp rate hike in June and now foresee a terminal target funds rate of 5.0-5.25% reached in May.”

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