Wall Street investment bankers are divided on whether the Fed will cut rates in 2023
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Wall Street’s biggest banks agree the Fed will raise US interest rates further next year, but they disagree about how much it will raise and whether to lower it by the end of 2023..

In a reflection of how hard the work of the president of the US Central Bank, Jerome Powell, is becoming the work of the president of the US Central Bank, leading economists are divided about whether the central bank will need to continue tackling stubbornly high inflation or whether recessionary risks and rising unemployment will become bigger concerns.

While there is broad consensus on the prediction that the Fed will raise its benchmark rate by 50 basis points to a range of 4.25% to 4.5% in December and then to around 5% in March, that is where ends the agreement on the perspective:

  • Economists at UBS Group AG forecast cuts of 175 basis points next year and Deutsche Bank AG predicts 1 percentage point cuts by the end of 2023
  • Nomura Holdings Inc. projects increases to 5.75% before a decline to 5%, while Barclays Plc sees cuts of 75 basis points in the last four months of the year
  • Morgan Stanley estimates that the maximum level will reach 4.75%, while Bank of America foresees a cut of a quarter point in December
  • Goldman Sachs Group Inc. and Wells Fargo & Co. expect rates to peak at 5.25% and stay there for the rest of the year, while JPMorgan Chase & Co. forecast rates to hit 5% and they will remain there until 2024
  • Citigroup Inc. expects a maximum range of 5.25% to 5.5% to be reached by mid-2023, and to stay there for the remainder of the year

“Given the uncertainties at play, it’s understandable that the forecast range is so wide,” said Jonathan Millar, a senior economist at Barclays in New York.

Although Powell and his colleagues now seem intent on signaling that they will maintain a tight monetary policy to bring inflation back to their 2% target, after posting 6.2% in September and 7% in June, Millar said that “we don’t I believe that this intention is feasible in our reference scenario where inflation falls rapidly and the economy enters a recession”.

In the markets, the Fed is expected to raise rates by half a point in December, in line with the economists’ vision and that rates will reach a maximum of close to 5% in March, and cuts of half a percentage point are discounted for December of 2023.

Of course, forecasting is risky work. As recently as January, most economists thought the Fed would be much less aggressive than it has been, according to a poll.

Some Fed watchers are now convinced that the Fed’s hawkishness will persist along with inflation, though in part because they are betting that the economy can hold up surprisingly well despite central bank tightening.

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