Fixed-income dealers' forecasts on future interest-rate hikes are all over the map after the Federal Open Market Committee (FOMC) raised interest rates by 25 basis points last week, in a move that was widely anticipated. Now that the Fed has raised 75bps this year, market professionals are expressing different opinions on which proverbial fork in the road it will take, highlighting the uncertainty about the strength of the economy and the bond market.
Predictions from bulge-bracket houses including Merrill Lynch andJ.P. Morgan vary by as much as 225bps for next year. Merrill is at the dovish end and expects the base rate to be 2%--just 25bps higher than where it is now--by the end of next year, according to James Caron, government bond strategist. J.P. Morgan, meanwhile, is at the other end of the spectrum and is calling for 4.25% by the end of next year, via a 50-point hike each quarter, according to Bruce Kasman, global head of economic research.
In the middle are firms such as Lehman Brothers, Morgan Stanley and Credit Suisse First Boston. Lehman calls for 2.75% while Morgan Stanley expects 3% by the end of 2005, with a 50bps raise in the first quarter and then two 25bps bumps in the following two quarters, according to David Greenlaw, the firm's chief U.S. fixed income economist. CSFB expects 3.5%, with a 50bps increase the first three quarters of the year, and a pause in December, according to Jay Feldman, CSFB's director of economic research.
The divergence seems to be caused by significant uncertainty regarding the economy's direction, Morgan Stanley's Greenlaw said. Furthermore, Fed watchers said the statement accompanying last week's rate hike was not as forward-looking as previous releases have been, leading to a wide range of forecasts.