Goldman Sachs Note Expects Fed to Pause Next Rates Hike Following Banking Crisis

Goldman Sachs (NYSE: GS) believes the US Fed would not hike rates as planned due to prevailing macroeconomic circumstances. In a note published Monday morning, the banking giant’s economist David Mericle pointed to the ongoing banking crisis as a deterrent. According to Mericle, the recent collapses of Silicon Valley Bank (SVB) and Signature Bank make any rate hikes unbearable. As a result, the Goldman economist predicts that the Fed would pause its planned rates hike until things simmer.

Speaking ahead of this week’s Federal Open Market Committee (FOMC) fiscal meeting, Mericle explained:

“We expect the FOMC to pause at its March meeting this week because of stress in the banking system. While policymakers have responded aggressively to shore up the financial system, markets appear to be less than fully convinced that efforts to support small and midsize banks will prove sufficient.”

Mericle also pointed out that besides the recent banking turmoil, the urgency to hike rates no longer holds sway. According to him, the inflation picture already appears much better than last summer. The reason is a sharp fall in near-term inflation expectations, with long-term inflation expectations also remaining anchored.

However, Mericle quickly acknowledged that the link between a 25 basis point hike and future inflation remains “very tenuous.” Thus, the Federal Reserve can swiftly resume its campaign to continue hiking rates to stem inflation. As it stands, the US apex bank still expects quarter-point increases in May through to July.

Goldman Economist Prediction on Fed Rates Hike Comes Amid UBS Bailout of Credit Suisse

As of last Friday, most Wall Street economists and analysts anticipated another rate increase of 25 basis points this week. The consensus was that the Fed would advance its inflation-battling scheme despite an already highly compromised financial sector. However, Mericle’s latest stance on the central bank’s next fiscal move is beginning to gain steam within his circles. Furthermore, his predictive assessment should also be a welcome relief to an already agitated banking space.

Executives at an early January meeting of the Virginia Bankers Association previously worried that Fed actions made it harder to compete for deposits. Touching on the subject, Richmond Fed President Thomas Barkin said the pressure from impending rate hikes was widespread and palpable.

The recent collapse of at least three prominent banks in the US sent shockwaves across the global financial sector. This contagion also spread to Europe, with Swiss banking giant Credit Suisse teetering on the brink of bankruptcy. However, Credit Suisse recently secured an emergency bailout from cross-town rival UBS.

UBS Chairman Colm Kelleher pointed out that acquiring Credit Suisse holds much attraction for UBS due to the embattled bank’s sheer size. According to him, these assets would further serve UBS’ agenda. As the UBS Chair put it:

“We have structured a transaction which will preserve the value left in the business while limiting our downside exposure. Acquiring Credit Suisse’s capabilities in wealth, asset management, and Swiss universal banking will augment UBS’s strategy of growing its capital-light businesses.”

However, Kelleher also admitted that the upside for Credit Suisse is limited to the ‘rescue’ nature of the deal.

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