Goldman: Fed Suggest A Slower Pace Of Tightening, Long 2-Year BEIs

Goldman Sachs note that “following a widely expected 75bp hike, Chair Powell addressed the question regarding the future path of the policy rate at his post-FOMC press conference. Our economists noted several arguments for slowing the pace of hikes going forward, including Powell’s observations that 75bp hikes were “unusually large,” that it would likely be appropriate to slow the pace of tightening as the policy stance turned restrictive, and that the full effect of rate hikes has not yet been felt.”

• “The U.S. yield curve bull steepened as a result, with Fed pricing declining not just in the front months, but through 2023 and 2024 as well. We had previously argued that front end pricing, at least through early 2023, ought to remain sticky given that inflation levels are likely to be still fairly elevated at that point in time, making rate cuts fairly unlikely. One scenario where cut pricing could be realized is if inflation converges much faster to the Fed’s target than we expect; indeed, markets appear to be implying a more rapid decline in inflation than our economists’ baseline.”
• “However, while we do expect deceleration in price gains, market pricing appears somewhat optimistic to us, especially given recent inflation and labor market data. As a result, we recommend adding 2-Year inflation longs, and like fading some of the front end repricing that has been accentuated by recession concerns.”
• They recommended entering longs in 2-Year breakevens at 3.30%, targeting a move to 3.60%, with a stop set at 3.05%.