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- The Federal Reserve isn't going to raise interest rates beyond May, according to Goldman Sachs.
- Fed minutes released Wednesday showed policymakers fretting that the banking crisis would lead to a mild recession in the US.
- Chief economist Jan Hatzius still sees a 35% probability of a US recession in the next 12 months.
Goldman Sachs no longer expects US interest rates to rise in June thanks to cooling inflation, a weakening jobs market, and the Federal Reserve's worries about last month's banking crisis.
"We are changing our Fed call to remove the hike we had previously expected in June. We continue to expect a hike in May, which would raise the target range to 5-5.25%," its team led by chief economist Jan Hatzius wrote in a note Wednesday.
They forecast the Fed will bring in a final 25-basis-point increase at its May 3 meeting, and then hold rates at that level until the second quarter of next year.
Investors got the minutes of the Fed's last meeting and the latest reading on US consumer inflation on Wednesday. Both give reason to suggest the US central bank has likely entered the final leg of its tightening campaign, according to the Goldman strategists.
The consumer price index showed a cooling in the rate to 5% in March, with so-called "shelter inflation" — which mainly measures rental costs — falling from 8.3% to 5.3%.
"While the large step down in shelter inflation is encouraging news for the inflation outlook, the March CPI report was in line with our expectations overall and is not the main reason for the change," the team said.
"Instead, we have taken out the June hike in part because the limited data available so far appear to confirm that credit is indeed somewhat tight in the aftermath of the banking turmoil, and in part because some Fed officials appear hesitant about even a May hike, which raises the bar for the Fed to agree at its May meeting to both hike and signal additional tightening," they added.
Minutes of the Fed's March meeting released Wednesday showed its policymakers expect last month's banking turmoil to drag the US economy into a "mild recession" by the end of 2023.
The collapse of Silicon Valley Bank on March 10 rattled other regional lenders, and has led several economists to warn the US could suffer a credit crunch as banks shore up their balance sheets by offering fewer loans, which would fuel a decline in overall spending levels.
In a separate research note published Wednesday, Hatzius stuck to his call that there's just a 35% probability that the US economy suffers a recession over the next 12 months.
He's sticking to his 35% call because he believes that the banking turmoil that the Fed was so worried about in March has had a limited impact since – with no more banks failing, the Fed scaling back some of its emergency support, and Americans stopping pulling their funds from smaller banks
"Our judgmental 12-month probability remains at 35%, above our 25% estimate prior to SVB weekend but far below the 65% Bloomberg consensus as well as the view of the Fed staff," Hatzius wrote in Wednesday's research note.
"The risk of an outright banking crisis has declined sharply, as no additional institutions have failed since the SVB weekend, Fed lending to banks has come off the highs, and deposit flight has subsided," he added.
Read more: The Fed is winning its war on inflation — and it means America could avoid a painful recession