Goldman Sachs On The Reduction In Hike Pricing Beyond The July FOMC

Goldman Sachs note that “market pricing of roughly 50bp increases of the policy rate at the June and July FOMC meetings has held steady during the recent rally in forward yields through the rest of the curve. The evolution of the option-implied probability distribution of Fed funds at YE2023 shows a significant reduction in the odds that the Fed will have to increase the policy rate substantially above our economists’ baseline. These declines reflect growing concerns about a significant weakening of the economy, and are also mirrored in inflation pricing. Data this week (both ISM surveys and the labor market report) should offer insight into the extent of slowing near term, though the still relatively high inflation levels expected through late summer/early fall means it will be hard to dislodge markets from pricing at least 25bp hike increments through the rest of the year. While much of the downward pressure on yields so far has been in 2023 and beyond (with the terminal rate repricing about 50bp lower from recent highs), evidence of a much sharper slowdown than we expect could lead to it migrating to hike pricing later this year. Conversely, signs that growth is faring better than feared would likely lead to renewed focus on inflation upside, and a reversal of the recent drop in 2023 pricing.”