• The Federal Reserve will hold rates at about 5% for an extended time, Goldman Sachs multi-asset solutions co-CIO, Maria Vassalou, said. 
  • Markets haven't fully priced in the potential for a significant slowdown next year, she added. 
  • "What the market is pricing in, in terms of terminal rate, may actually be way too optimistic."

Federal Reserve policymakers will have to keep benchmark rates elevated for an extended stretch of time, and markets haven't priced that in, according to Goldman Sachs' multiasset solutions co-CIO, Maria Vassalou.

Inflation remains much higher than where the Fed would like it to be, while the economy still appears strong, Vassalou told Bloomberg TV Tuesday, adding that the market has focused on the pace of rate hikes rather than the peak level.

"That means that what the market is pricing in, in terms of terminal rate, may actually be way too optimistic, and so we are very concerned in terms of a more significant slowdown than what the market is pricing into 2023," she warned.

And if inflation expectations become deeply entrenched, she added, the Fed may be forced to push the terminal rate higher than expected.

In her view, for the Fed to raise rates to a peak just to cut them immediately would not be consistent with the notion that the policy is effective, as rates aren't meant to be adjusted up and down on a quarterly basis.

"If they raise them and then subsequently have to cut them that means they overtightened, we have some financial crisis they need to deal with, and that's why they're doing it," Vassalou said. "So the expectation is they will raise rates, probably about 5% given incoming data, and they will have to stay at this restrictive level for a period to come." 

Traders are largely expecting a half-point interest rate hike at the December 13-14 Fed meeting, according to CME's FedWatch tool, which would bring the target rate to the 4.25% to 4.50% range. 

Early next year, additional increases are seen that would bring the fed funds rate at or just above 5%.

Read the original article on Business Insider

Dit artikel is oorspronkelijk verschenen op z24.nl