Wall Street’s most pessimistic bank sees a federal funds rate of nearly 5% on the horizon

As the gloom in financial markets continued to deepen on Friday, Deutsche Bank, Wall Street’s most pessimistic bank, released another telling view: Its U.S. economists, led by Matt Luzzetti, now expect the Federal Reserve to end its rate hike campaign. to 4.9% in the first quarter of 2023. The notion of a nearly 5% federal funds rate, which in Deutsche Bank’s own words is “way beyond” what the market is pricing, comes a few days before the next Fed meeting on September 20. -21 and as investors remain worried about how high interest rates will be to combat the worst period of inflation in four decades. Investors were still trying to figure out the likelihood of the fed funds rate target going above 4% by the end of the year, and the stock market continued to sell off on Friday – fueled by a FedEx earnings warning Corp. (FDX), as well as inflation and rate fears. Few, if any, market participants have openly discussed the prospect of a federal funds rate target of nearly 5%, essentially double the current level of 2.25% to 2.5%. Such a scenario would likely have an even more penalizing impact on equities than predicted by billionaire investor and hedge fund manager Ray Dalio, who estimates that a 4.5% level on rates would have a negative impact. 20% on stock prices.

Meanwhile, a key market rate – the one-year Treasury yield – was around 4% on Friday after breaking that level earlier – a development that some say could spill over to other rates and exacerbate financial market concerns in the United States. and abroad. “Matt has consistently been the highest on the street for economists in recent months” when it comes to interest rate forecasts, Deutsche Bank’s Jim Reid, Henry Allen and Tim Wessel wrote in a note Friday. U.S. bank economists revised their expectations after Tuesday’s unexpected consumer price index report for August, and the upgrade is now closer to the 5%-6% range. that some at Deutsche Bank believe is necessary to control inflation. in financial markets, with all three major stock indexes down since the New York open. Meanwhile, Treasury yields first climbed on a sell-off in government debt, before stabilizing as pockets of bond buying emerged. Deutsche Bank was the first major Wall Street bank to declare a US recession in April. That same month, he went further to say he saw downside risk in his own pessimistic view. In June, Wessel, a macro strategist, said he saw a chance that inflation would not decelerate. And just three days ago, Allen, a research analyst, said “the pessimists will unfortunately prevail on this occasion” when it comes to the debate over the US economy’s ability to achieve a soft landing. .

– Vivien Lou Chen


(END) Dow Jones Newswire

09-16-22 1136ET

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