Don’t expect Fed rate cuts in 2023

If you are a hardcore stock market bull praying for a rip-your-face-off rally ignited by the specter of a Fed rate cut in 2023, you may want to recalibrate that thinking, the team at Goldman Sachs warns.

“We are doubtful that the inflation path that we forecast for next year would be enough to provide that confidence [in a rate cut],” Goldman Chief Economist Jan Hatzius wrote in a note out Thursday.

The Fed surprised market watchers on Wednesday in two ways after lifting interest by 50 basis points, bringing the benchmark interest rate to the highest level since 2007.

First, the Fed’s economic forecasts now show officials seeing rates peaking at 5.1% in 2023. That’s an extra 50 basis points higher than predicted back in September.

Second, Fed chief Jerome Powell sounded a touch more hawkish on the path of policy than some expected. Chatter had been growing that the Fed would only lift rates by 25 basis points at its February 2023 meeting amid a cooling in the Consumer Price Index (CPI) and slowing job market growth.

Powell essentially shut down that talk, putting stocks under pressure into Wednesday’s close as early action on Thursday.

Fed Chair Jerome Powell holds a news conference at the Federal Reserve Building in Washington, US on December 14, 2022. REUTERS/Evelyn Hockstein

“The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases,” Powell told reporters at a post Fed decision conference. “But it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”

Goldman’s Hatzius is modeling for three additional 25 basis point rate hikes in February, March, and May. The interest rate peak for this cycle, Hatzius surmised, is 5% to 5.25%.

Yahoo Finance’s Jennifer Schonberger contributed to this story.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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