Barclays, NatWest expect Fed to raise rate hike pace in March

ECONOMISTS at UK-based banks Barclays and NatWest believe that the US Federal Reserve (Fed) could ramp up the pace of its interest-rate rises in March by delivering a half-point hike, following key inflation data released on Friday (Feb 24).

NatWest said on Friday that it also expects 25-basis-point hikes at the Fed’s May and June meetings, which would take the terminal rate to 5.75 per cent, up from an earlier estimate of 5.25 per cent.

“Given (Friday’s) inflation backdrop, and the fact our monthly core-inflation profile now shows that the Fed’s preferred core personal-consumption-expenditures (PCE) deflator holds above 4 per cent year on year through July, we are raising our Fed funds terminal rate forecast to 5.75 per cent,” said NatWest Markets chief US economist Kevin Cummins in a note on Friday.

Barclays on Monday also said that persistent inflationary pressures and economic resilience could lead the Fed to hike rates by 50 basis points next month, especially if the non-farm payrolls data due before the Fed’s meeting in March is strong.

“The bond market has moved to ‘higher for longer’, feeding negative reactions in credit,” the bank said.

Economic data had indicated that inflation was starting to slow, prompting the Fed to downshift to a quarter-point rate rise at its policy meeting on Jan 31 to Feb 1. However, the numbers since then may have thrown into doubt Fed chair Jerome Powell’s view that the “disinflationary process” has begun.

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Strong labour-market data, sticky consumer prices, rising producer prices and now the accelerating PCE price index – the Fed’s preferred measure of inflation – have prompted markets to price in additional rate hikes, and price out rate cuts at the end of the year.

Money markets now price in a terminal Fed funds rate of around 5.4 per cent by the July meeting, up from 4.5 per cent to 4.75 per cent currently, as indicated by Refinitiv data. That is up from an estimated peak of 5.2 per cent just two weeks ago.

NatWest and Barclays, as well as a raft of other banks including Goldman Sachs, believe that there will be more rate hikes from the Fed. REUTERS