What tighter credit means for the Fed

- Also: The global housing market might have further to slide. --------------------------------------------------------------- In today's edition: - Will tighter lending act as a substitute for Fed rate hikes? - “Concerns about some of these banks are getting amplified in ways that we just haven't seen in the past, via social media.” — Our [Exchanges podcast examines how technology has changed bank runs.]( - And [Goldman Sachs' 10,000 Women program celebrates its 15th anniversary.]( (Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- Can tighter lending be a substitute for Fed rate hikes? The Federal Open Market Committee raised its funds rate on March 22 by 25 basis points to 4.75-5%. But policymakers projected a weak economic outlook for the rest of 2023 and a more cautious path for the funds rate than Chair Jerome Powell had been telegraphing before the recent banking turmoil. Powell said tighter credit conditions are likely to weigh on economic activity and might substitute for one or more rate hikes, but he was quick to note that the FOMC could re-evaluate as it learns more about the impact of recent events. Our economists also expect stress on small and midsize banks to result in tighter lending standards, which they estimate will impose a 0.25 to 0.5 percentage point drag on GDP growth, equivalent to the impact of 25-50 basis points of rate hikes, Chief U.S. Economist David Mericle wrote in the [team's research note](. While Goldman Sachs Research thinks the pressure on banks has increased the chances of a recession, [our economists' baseline economic forecast is stronger than the FOMC's]( They expect GDP growth of 1.2% in 2023 (on a Q4/Q4 basis) instead of the FOMC's 0.4%, and they expect the unemployment rate to remain unchanged at 3.6% instead of rising to 4.5%. Goldman Sachs economists also left their forecast for the peak funds rate unchanged at 5.25-5.5% and now expect additional 25 basis points rate hikes in May and June. Their baseline forecast is 25 basis points above the Fed's forecast of 5-5.25%. --------------------------------------------------------------- Tech accelerates bank runs as commercial real estate comes into focus Credit Suisse, unlike most of Europe's banks, was under sustained pressure in financial markets over capital and liquidity concerns, says Goldman Sachs Research analyst Chris Hallam in the [latest episode of Exchanges at Goldman Sachs.]( The bank's rescue was seen as key for the financial system given its systemic importance. But Hallam doesn't expect the event to spark the kind of financial turmoil seen during earlier crises in the region. “Because the starting point in terms of capital and liquidity is so strong, we don't really expect to see a sharp and sudden adjustment to bank behavior as was observed in the global financial crisis or the euro area sovereign crisis,” he says. In the U.S., one sector where banking stress may impact the economy first is in commercial real estate, says Goldman Sachs Research's Richard Ramsden, business unit leader of the Financials Group. Valuations for office and retail properties have been depressed since the pandemic amid lower occupancy rates and concerns about changes in how people work and shop in the post-Covid environment. And lending to the sector is concentrated in small and mid-sized banks, where the pressure on deposits and liquidity has been most acute. “I do think you will see banks pull back on commercial real estate commitments more rapidly in a world [where] they're more focused on liquidity,” Ramsden says. “And I do think that is going to be something that will be important to watch over the coming months and quarters.” The rapid shift in bank deposits also illustrates how technology has changed the banking sector since the financial crisis in 2008. Silicon Valley Bank and First Republic each lost around 30 to 40% of their deposits in a short period of time, Ramsden says. “Today you can move cash seamlessly and almost instantaneously between institutions, and there really is not a lot of friction,” he added. “Concerns about some of these banks are getting amplified in ways that we just haven't seen in the past, via social media, and that is obviously resulting in these much more pronounced deposit runs than we saw even in the global financial crisis in 2008.” [Listen to the full podcast.]( --------------------------------------------------------------- Why the global housing market has further to slide Higher mortgage rates continue to take their toll on housing markets around the world, and [sales and prices will likely keep softening at least through the end of this year in most G10 economies, according to Goldman Sachs Research.]( After a surge in housing activity during the pandemic, home sales pulled back sharply in the second half of 2022, when rate hikes enacted by central banks caused mortgage rates to spike in most developed market economies. A contraction in housing starts, sales and prices has persisted this year and “shows little sign of stopping,” write Goldman Sachs economists Joseph Briggs and Giovanni Pierdomenico. Recent financial turmoil has increased uncertainty for the housing outlook as ongoing pressures could cause smaller banks to tighten lending standards, despite declines in long-term yields. Higher borrowing costs for homebuyers have weighed heavily on housing affordability and the full impact likely hasn't been felt yet. The GS Research team estimates that each 100 basis point rise in mortgage rates leads to a 6% decline in residential fixed investment after three or four quarters and a 2.5% drop in house prices after 10 quarters. The timing of the impact isn't uniform across the world; differences in mortgage markets across countries can speed or slow the impact. Countries with higher shares of fixed-rate mortgages, for example, tend to experience delayed rate impacts. Since mortgage rates have only recently peaked in most countries and could be headed higher still, the global housing market may not have yet found its bottom, according to the report. --------------------------------------------------------------- Forecast change: Oil price drop Even as China's economic reopening creates a boom in oil demand, crude prices have dropped over the last two weeks as concerns about a U.S. recession rise. Oil prices had already begun to drop when Federal Reserve Chair Jerome Powell on March 7 hinted at a return to 50 basis point hikes, reviving recession fears. However, a sharper drop coincided with signs of stress across the banking system and a decline in bank stock prices and interest rates. Historically, it has taken time for oil prices to recover from these kinds of events in high-uncertainty environments. Given this longer path to recovery, Goldman Sachs Research has cut its price forecast for Brent crude, the global benchmark, to $90 a barrel by the end of 2023 and to $94 per barrel for the 12 months ahead (both down from $100 previously). --------------------------------------------------------------- 10,000 Women Growth Fellowship: 15 years of impact, 10,000 opportunities ahead Goldman Sachs' David Solomon, Asahi Pompey & Charlotte Keenan with graduates at our Growth Fellowship It's been 15 years since the launch of the [Goldman Sachs 10,000 Women]( a global initiative that provides women entrepreneurs around the world with business education, access to capital, mentoring and networking. To date, 10,000 Women has reached more than 200,000 women in over 150 countries, and invested more than $2.8 billion. To mark the 15 year anniversary, we invited 15 trailblazing entrepreneurs from each graduating year to travel [to New York and Washington D.C. for our Growth Fellowship program.]( Over four days, the fellows received coaching, mentoring, and networking from Goldman Sachs employees, all with the goal of business growth. Some of our leaders reflect on the event and the milestone below: - David Solomon, chairman and CEO — “The program has now provided business and management education, mentoring and access to capital for more than 200,000 women entrepreneurs across over 150 countries… I'm very proud of this initiative, which has far exceeded its initial target of $600 million in investments.” - Asahi Pompey, global head of Corporate Engagement — “Nothing fills me with greater optimism than meeting with our 10,000 women graduates. They are the future to a thriving, inclusive economy and we are honored to be on that journey with them.” - Charlotte Keenan, head of the Office of Corporate Engagement International and global head of 10,000 Women — “The 15 phenomenal women entrepreneurs hail from eight countries around the world, and every single one of them is pushing the boundaries of innovation and creativity — they are the future of entrepreneurship and we are with them every step of the way.” --------------------------------------------------------------- Success looks different for entrepreneurs focused on personal performance Talks at GS recently hosted two entrepreneurs who are having a big impact in the world of physical achievement, albeit in very different ways. Despite those differences, their journeys share a remarkably similar approach to reaching success that includes hard work, bravery and meticulous preparation. - Michael Horvath, the CEO and co-founder of Strava, [has helped transform his business into one of the leading digital fitness platforms in the world, with more than 100 million registered users of the app](. In recent years, Strava has zeroed in on its subscription business to ensure success, Horvath says. “You have to decide what you're going to be best at and do that,” he says. “And you have to get an A in it — you can't get Bs." - For adventure athlete and filmmaker Jimmy Chin, being diligent isn't just a choice, it's a matter of life and death. [He recounts not only surviving a massive avalanche but also the importance of preparation and managing fear correctly.]( “When you know that the potential outcome could be fatal and you still choose to do something, you're living a life with deep, deep intention,” Chin says. --------------------------------------------------------------- Briefings brainteaser: The Bank of England's rate hikes Turmoil in the banking sector is complicating policymaking at central banks in the U.S. and Europe. The Bank of England raised its main policy rate this week by a quarter of a percentage point after an inflation report came in higher than expected. How many consecutive policy rate increases has the BoE now implemented? A) 8 B) 9 C) 11 D)14 [Check your answer here.]( --------------------------------------------------------------- ICYMI: In the media [Bloomberg]( March 23 [Goldman's Koul on Fed hike, Asia markets]( (6:11) [CNBC]( March 22 [Financial contagion hitting oil markets, not physical contagion, says Goldman's Jeff Currie]( (4:26) [CNBC]( March 22 [Goldman Sachs is using ChatGPT-style A.I. in house to assist developers with writing code]( [CNBC]( March 21 [2024 could be a ‘big year' for tech IPOs, Goldman Sachs says]( (3:15) --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. 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