Goldman: Potential Step Down In Pace Of Hikes A Steepener

Goldman Sachs note that “FOMC minutes from the July meeting appeared to signal a preference to slow the pace of hiking, consistent with our economists’ expectations for a 50bp hike at the next meeting and a further downshift to 25bp at subsequent meetings.”

• “Such a shift would allow for some steepening of deeply inverted forward curves for two reasons:”
• “First, less front-loading of hikes could increase the odds of a more extended cycle… A more measured pace of policy rate increases would allow the Fed to calibrate policy better and reduce the risk of overshooting deep into restrictive territory, thereby lowering the odds of future cuts.
• “Beyond a step down in hiking pace, the minutes also revealed that some participants indicated that they would be comfortable maintaining the policy rate at a sufficiently restrictive level “for some time” to ensure that inflation was firmly on a path back towards target.”
• “Outside of Fed policy, the current mix of data have also been supportive of an unwind of near-term forward curve inversion: growth data have been less bad than feared, and the sticky components of inflation are still a source of concern despite the downside misses in CPI/PPI.”
• “As a result, the Dec 22/Dec 23 OIS forward curve is 50bp off its lows, and we believe there is room for similar forward curves further out to steepen.”