Goldman Sachs: Attention On Powell Hinting At 50bp Hikes Beyond June

Goldman Sachs agrees with consensus on a 50bp hike and QT announced at the May meeting, and they say the key question is what comes next.

• Despite Bullard raising the possibility of 75bp hikes in future, this is unlikely (but not implausible under certain circumstances).
• Statement: Minimal changes apart from rate hike and balance sheet runoff; overall, “lower-than-normal risk of either a hawkish or dovish surprise.”
• Press conference: Pay close attention to any Powell comments that suggest 50bp hikes beyond June. “For example, a shift in language indicating an intention to hike expeditiously “to neutral” (vs. “toward neutral”) would likely signal the FOMC intends to continue hiking in 50bp increments past June.”
• Future action: Another 50bp hike in June, then 25bp per meeting for rest of 2022. But “reasonably high chances” of 50bp hikes until reaching 2.25-2.50% (which is the FOMC median “neutral” rate).
• The March FOMC minutes opened the door to MBS sales, but “our best guess” is that they won’t “since FOMC participants have a strong preference for using the policy rate as the primary tool for adjusting monetary policy and MBS holdings as a share of the Fed’s balance sheet will most likely never rise to an uncomfortable level.”