(Reuters) – Analysts and Wall Street investors who believe the U.S. Federal Reserve moved too slowly to tackle high inflation are now anticipating even more aggressive rate hikes as the central bank catches up.
A source close to JPMorgan Chase and Co CEO Jamie Dimon said he now expects 12 to 15 rate hikes – a cumulative 300 to 375 basis points – in this hike cycle. That’s up from the six or seven rate hikes Dimon predicted during the bank’s January earnings call.
It’s the latest recalibration among banks and investors since the U.S. central bank last week raised its key rate by a quarter of a percentage point and set an aggressive path of further hikes to counter inflation. That was followed on Monday by Fed Chairman Jerome Powell saying the bank needed to act quickly to bring inflation down and could use larger than usual interest rate hikes if needed.
A parade of Fed officials – some of whom are now seen as political doves – came out in Powell’s wake to echo the call for quick and, if necessary, aggressive action on a three-fold inflation rate. above their target level of 2% per year.
“The Fed has seen the light on inflation … and therefore is essentially admitting to being behind the curve,” NatWest analysts said in a research note Thursday, adding that investors will become “increasingly concerned about the makes the Fed induce a recession, and soon.”
Sharp moves in the US Treasury market increasingly signal the risk of such a recessionary scenario as markets doubt the Fed’s ability to stage a ‘soft landing’ for the economy as it tightens monetary policies.
Goldman Sachs said on Thursday it raised its forecast for U.S. Treasury yields for this year, citing more widespread and lingering price pressures and a more hawkish pivot from the Federal Reserve.
The Fed is expected to raise rates to 2.4% by February 2023 from 0.25-0.50% currently, with the market pricing a 76.8% chance that the Fed will hike 50 basis points in May. [FEDWATCH]
“They’re way behind,” Jeffrey Gundlach, the billionaire CEO of investment firm DoubleLine Capital, said in an interview with CNBC after the Fed raised rates last week.
He was referring to indicators such as wage growth as well as rising two-year Treasury yields, comparing them to the federal funds rate.
That was echoed by Deutsche Bank, which in a note this week said the Fed could raise rates at every meeting for the foreseeable future, with 50 basis point hikes likely in the near term. “The Fed is behind the curve and will need to rise fast and far to get inflation under control,” he said.
Capital Group Companies Inc, one of the world’s largest investment management firms, weighed in last week with a note saying “inflation will remain elevated” and monetary policy is behind the curve.
For Larry Fink, chief executive and chairman of the world’s largest asset manager, BlackRock Inc, central banks face a dilemma they haven’t had to face in decades – and the Russia-Ukraine war the further complicates.
“Central banks must choose between living with higher inflation or slowing economic activity and employment to bring inflation down quickly,” he said on Thursday.
(Reporting by Reuters staff including Davide Barbuscia and Ira Iosebashvili; Editing by Megan Davies and Matthew Lewis)
