Interest rates: Goldman Sachs sounds alarm on potential aggressive hikes

Brian Sozzi

Monday night's WSJ story about interest rates was heard around the world, including among the top strategists at Goldman Sachs and Evercore ISI.

WSJ previewed Federal Reserve policy decision, strongly suggesting that a 75 basis point rate hike was on the table. Market participants had previously generally assumed that a 50 basis point rate hike was most likely as the Fed looks to tackle red-hot inflation.

The story sent Wall Street scrambling into the evening hours to recalibrate rate expectations, suggesting the potential for another rocky session for stocks on Tuesday after a drubbing on Monday.

Here are two notes from Wall Street that are getting the attention on after-hours trading desks:

Goldman Sachs Chief Economist Jan Hatzius

  • Client note headline: "Revising Our Fed Forecast to Include 75bp Hikes in June and July Following a Hint in the Wall Street Journal"

"Our best guess is therefore that the article is a hint from the Fed leadership that a 75bp rate hike is coming at the June FOMC meeting on Wednesday," the usually-upbeat Hatzius wrote. "We have revised our forecast to include 75bp hikes in June and July. This would quickly reset the level of the funds rate at 2.25-2.5%, the FOMC’s median estimate of the neutral rate. We then expect a 50bp hike in September and 25bp hikes in November and December, for an unchanged terminal rate of 3.25-3.5%."

Hatzius also struck a downbeat tone on economic growth.

"The additional tightening of financial conditions on Friday and Monday, driven by a rise in terminal rate expectations to about 4%, would imply a meaningful further drag on growth that goes somewhat beyond what we think policymakers intend at this point or should be targeting to have the best chance of bringing down inflation without a recession," Hatzius added.

The Empire State Building is lit with a white and red
The Empire State Building is lit with a white and red "siren" in its mast to pay tribute to medical workers battling the coronavirus outbreak on April 1, 2020 in New York City. (Photo by JOHANNES EISELE/AFP via Getty Images) (JOHANNES EISELE via Getty Images)

Evercore ISI Strategist (and former NY Fed EVP) Krishna Guha

  • Client note headline: "WSJ Report Puts Us On Alert for Fed 75BP Hike This Week; We Think Mistake and Bad for Risk"

Guha pulled no punches in his flash note to clients after the WSJ story dropped.

"We take seriously a report from the WSJ’s [Nick] Timiraos that suggests the Fed could surprise the markets with a 75bp rate hike this week," Guha stated. "While the article is carefully written with many caveats and policy alternatives, we think it de facto tees up a 75[bp] this week. This is not what we anticipated, not what we think is optimal policy, and, separately, not in our view good for markets."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance

Download the Yahoo Finance app for Apple or Android

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube

Advertisement