Stocks Could Fall Sharply If Fed Rates Rise, According To Goldman

According to Goldman Sachs, difficulties for stocks and other assets could result from a Federal Reserve that is more proactive in raising interest rates.

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This week, Fed Chairman Jerome Powell shocked Wall Street by declaring that he anticipates the central bank would raise interest rates more than initially anticipated in a series of meetings on Capitol Hill. In his semi-annual testimony on monetary policy, Powell said that hotter inflation figures indicate that the Fed still has work to do.

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According to a CME Group estimate, traders have quickly priced in higher rates and now anticipate that the Fed would approve a move of 0.5 percentage points when it meets in less than two weeks.

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Even while Goldman believes it's "tight call" if the Fed will still approve a 0.25-point raise, the company is now preparing for a higher trajectory for rates.

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In a client note, Goldman economist Jenny Grimberg predicted that if the Fed picks up speed and policy tightening once more becomes front-loaded, yields might continue to rise, risky assets could fall even further, commodities could restart their slump, and the dollar could go much higher.

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Grimberg noted that if the Fed believes it can continue in quarter-point increments, it might offer "some comfort" for risk assets.

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But, the company also indicated that it anticipates a stronger-than-anticipated improvement in economic activity later in the year, which would induce the Fed to tighten monetary policy even further.

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According to Grimberg, the prospect of a US growth reacceleration next year as the effect of last year's fiscal and monetary policy tightening fades could prompt the Fed to raise rates even further. We believe that consumer spending in particular could be the cause of such an early acceleration because we foresee a sizable chance that consumption would expand faster than anticipated in 2023.

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The following Federal Open Market Committee meeting is scheduled for March 21–22. According to CME statistics, markets were pricing in a nearly 81% likelihood that the meeting would result in a rate increase of 50 basis points, or 0.5 percentage points.

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The expected peak, or terminal, rate has also been pushed up by the markets to a range of 5.5%-5.75%, and Goldman has updated its projection to reflect this change. As of Thursday morning, the October fed funds futures price implied a terminal rate of 5.665%.