By Senad Karaahmetovic
Goldman Sachs has removed a June rate hike from its Fed forecast after the March CPI report showed inflation is slowing.
The bank now expects one more rate hike by 25 basis points in May, which would raise the target range to 5-5.25%.
“While the large step down in shelter inflation is encouraging news for the inflation outlook, the March CPI report was in line with our expectations overall and is not the main reason for the change,” Goldman Sachs' economists said in a client note.
“Instead, we have taken out the June hike in part because the limited data available so far appear to confirm that credit is indeed somewhat tight in the aftermath of the banking turmoil, and in part because some Fed officials appear hesitant about even a May hike, which raises the bar for the FOMC to agree at its May meeting to both hike and signal additional tightening not currently implied by the median dot.”
While risks are tilted toward rate cuts after May, the bank doesn’t believe the Fed will cut “as much as implied by market pricing.”
Goldman also reaffirmed its forecast that estimates chances for the U.S. to enter a recession at 35%. This is “far below” the Bloomberg consensus of 65%.
“The risk of an outright banking crisis has declined sharply, as no additional institutions have failed since SVB weekend, Fed lending to banks has come off the highs, and deposit flight has subsided… However, it would be premature to sound the all-clear on the banking stress as significant uncertainty remains,” the bank's economists added.
Overall, the broker doesn’t believe asset market returns will be “stellar”.