Goldman Sachs, Barclays warn: Fed will not cut interest rates this year

Following Barclays Plc, Goldman Sachs Group Inc. also advised clients in its latest report not to hold out hope that the Federal Reserve will cut interest rates this year.

On Monday, pricing in swap contracts tied to the date of the Fed's meeting still indicated the Fed's policy rate would be about 70 basis points below current levels by the end of the year. In the latest report, Goldman Sachs strategists led by Praveen Korapaty advised clients to buy contracts corresponding to the December Fed meeting, which is expected to rise.

“We acknowledge that there are some near-term risks, such as concerns about small U.S. banks and the unresolved U.S. government debt ceiling, that could price in deeper rate cuts. However, expectations for a Fed rate cut may be overdone given the strong macro backdrop，" they wrote.

They point out that historically, when the Fed makes a series of rate hikes (last week was the 10th since March 2022), there are usually two meetings where it decides not to make any further rate changes. The most likely outcome for the next six months is "Fed on hold". But such a view is contrary to the degree of easing this year that the market is currently pricing in.

Prior to this, Barclays strategists advised clients last week to short the August US federal funds rate futures at 95.06. They expect pricing expectations of big rate cuts this year to fade.

The latest futures positioning data from the U.S. Commodity Futures Trading Commission (CFTC) showed that hedge funds expect the Federal Reserve to keep interest rates high for longer. Before the Federal Reserve announced its decision to raise interest rates last Wednesday, that is, in the week ended May 2, the total size of hedge funds' short positions in U.S. bond futures hit a record high since the CFTC, and it was the seventh consecutive week of increase in short positions.

Meanwhile, a compelling theme in options markets last week was the fading rate cuts priced in by SOFR (Secure Overnight Financing Rate) futures.

This week, a new batch of U.S. inflation indicators will be released, and the pricing of the Fed's interest rate policy has entered a critical period. U.S. CPI and PPI for April will be announced on Wednesday and Thursday, Eastern Time, respectively.

At present, the CME Fed Watch tool shows that by the end of this year, the chances of the Fed holding back is only 1.2%, and the chances of cutting interest rates by 25, 50, 75, and 100 basis points on the current basis are 10.2%, 34.1%, 39.9, and 14.6%, respectively.