Wall Street economists say rate hikes are over, even if the Fed won't admit it

Published Thu, Jul 27 202312:48 PM EDT

Federal Reserve officials may not know it yet, but they're not raising interest rates anymore in the current cycle. At least that's the opinion across much of Wall Street, where the money is rising on the likelihood that Wednesday's quarter-point rate hike was the last one before the Fed goes on pause, then ultimately starts cutting. "We continue to expect that today's hike will be the last of the cycle," Goldman Sachs economist David Mericle told clients in a post-mortem after the two-day Federal Open Market Committee meeting Wednesday. Goldman has been out of consensus in that it sees a lower probability of a looming recession than most of the Street, and expects the Fed to have to do less to bring down inflation. In particular, the firm latched onto Federal Reserve Chairman Jerome Powell 's comments that the Fed will let the data guide it going forward and will not be wed to a specific formula for raising rates. Goldman expects the data to justify the Fed to back off from further tightening. "Powell said that the FOMC will be particularly focused on the inflation data, and we expect the next few [consumer price index] reports to be soft," Mericle wrote. "As a result, we expect that the FOMC will skip September in order to slow the pace and will then conclude in November that inflation has slowed enough to make a final hike unnecessary." Market expectations That line of thinking is backed up by market pricing. Traders in the fed funds futures markets are putting odds of another hike before the end of the year at no higher than 35% or so, according to midday Thursday data from the CME Group . The implied fed funds rate for the December contract is at 5.41%, just above the midpoint of the 5.25%-5% target range following Wednesday's hike. Economic reports Thursday helped bolster the no-hike outlook. Gross domestic product grew at an annualized 2.4% in the second quarter, better than expected. On top of that, a Commerce Department gauge that Fed officials follow closely showed inflation running at just a 2.6% pace for the quarter, well below the first three months of the year and shy of the 3.2% Dow Jones estimate. "Our Fed views remain unchanged," wrote Matthew Luzzetti, chief U.S. economist at Deutsche Bank. "In particular, we continue to see [Wednesday's] hike as the last of the cycle, as somewhat faster disinflation coupled with a softening in growth and the labor market – conditions Powell noted are necessary to consider pausing – will become more evident in the coming months." Morgan Stanley chief U.S. economist Ellen Zentner took it step further, saying she expects the economy to achieve a "soft landing ... with inflation and wages slowly easing, well as job gains." Zentner said the current target range is likely to hold for "an extended period" before the Fed starts cutting in March 2024. That's just a bit more aggressive than market pricing, which sees cuts starting in May of next year. Some still see a hike ahead For his part, Powell said he's "taking with a grain of salt" forecasts for the Fed to start cutting next year. And to be sure, not everyone on the Street thinks the Fed is done this year. Bank of America, Citigroup and Barclays all see one more hike coming before the Fed puts a stop to a tightening cycle that has seen 11 rate hikes worth 5.25 percentage points since March 2022. "We expect the FOMC to hike another 25bp in November, hold through June, then make four incremental cuts to the funds rate from July-December 2024," wrote Marc Giannoni, chief U.S. economist at Barclays. "While we lack strong conviction about the timing of the next hike, we view November as the most likely outcome. In our view, risks around this path are skewed to the upside." The latter mark references Giannoni's belief that the Fed is probably more likely to hike twice more than it is to stop.