Just a few weeks into 2016, the Fed interest rate hikes that big banks were counting on to boost revenue clearly aren't coming.
A growing chorus of economists at banks including Goldman Sachs, Wells Fargo and Bank of America Merrill Lynch have said in recent days that the Federal Reserve won't raise interest rates as much as was anticipated toward the end of 2015. Most economists backed off predictions the Federal Open Market Committee will move in less than a month, when it meets again in mid-March.
"We expect the Fed to raise short-term interest rates only once before year end," Wells Fargo analysts wrote in a report issued Wednesday, representing a change in expectations. "Since we originally set our targets in October 2015, market and economic conditions have deteriorated."
After March, it's less clear when — or if — the central bank will follow through on other expected interest rate increases. A combination of disappointing macroeconomic data, stock market turbulence and threats to the stability of the U.S. economy has left the central bank with few arrows in its quiver to stave off crisis.
Even investment-grade corporate bond sales stalled, almost completely last week, and investors began to recently price in rising odds of a U.S. recession. Also Wednesday, St. Louis Federal Reserve Bank President James Bullard said on CNBC that he believes it would be unwise for the FOMC to keep hiking rates in the face of stagnating inflation.
Bullard is a voting member of the committee, and in the past had been pushing the central bank to raise rates sooner rather than later.
It's a potential reversal that would prove costly for U.S. consumer banks. Billions of dollars they would have been expecting through deposits left at the Fed either would be reduced or eliminated based on whether the central bank holds rates steady or cuts them and goes negative. Other asset yields would be similarly affected.
However, the Fed's minutes from its January meeting, released Wednesday, helped drive home the point to top economists that the bank is going to hold off on rate hikes, at the very least, until it can better project its view of the U.S. economy.
In a note Thursday, Bank of America Merrill Lynch scaled back its hike predictions from three or four, down to two. Further, according to BofAML analysts, the market's view of the likelihood of a U.S. recession has grown to 50 percent. Also, in early February, Goldman Sachs analysts revised their Fed call, abandoning the expectation that the Fed would hike in March, but still pricing in three rate hikes over the course of 2016.
"'Several participants' noted that it would be more difficult for monetary policy to respond to negative chocks and that it would therefore be 'prudent' to wait," Goldman Sachs analysts said in a separate report Wednesday.