Goldman Sachs now expects the Fed to hike rates four times this year, one more than previously expected. The estimate comes once morest a background of rising inflation and tensions in the job market. Along with the rate hikes, GS expects the Fed to reduce its bond holdings soon.
Persistent high inflation combined with a labor market close to full employment would therefore push the Fed to increase its interest rates more than expected this year, according to the latest forecasts from the investment bank. The Wall Street firm’s chief economist Jan Hatzius said he now expects the Fed to make four quarter-percentage point rate hikes in 2022, which is an even more aggressive path than the indications provided barely a month ago. The rates are currently in a range between 0 and 0.25%.
“We continue to see (rate) hikes in March, June and September, and have now added a hike in December for a total of four in 2022,” the investment bank said. Goldman had previously forecast three hikes, in line with the level Fed officials said following their December meeting.
The outlook is therefore hardening, as prices in the United States are progressing at the fastest pace in nearly 40 years (7.1% expected growth in the consumer price index which will be revealed on Wednesday – the largest gain since June 1982).
At the same time, Hatzius and other economists don’t expect the Fed to be put off by the decline in job growth. The United States would have generated just 199,000 non-farm jobs in December, according to Friday’s publication, well below the consensus estimate of around 400,000. However, the unemployment rate fell to 3.9% as job openings far exceeded research, reflecting a rapidly tightening job market.
Hatzius believes these factors will cause the Fed not only to hike rates by a full percentage point, or 100 basis points, this year, but also to start shrinking the size of its balance sheet, which is at the skyrocketing level of 8,800. billions of dollars. He specifically pointed to a statement last week from San Francisco Fed President Mary Daly which asserted that she might see the Fed starting to dump some assets following the first or second rate hike.
Until a few months ago, the Fed was buying back $ 120 billion a month in treasury bills and mortgage-backed securities. From January, these purchases will be split in half. They should be completely phased out in March. Asset purchases have helped keep interest rates low and keep financial markets functioning well. The Fed will likely allow a passive flow of the balance sheet, allowing some of the proceeds from maturing bonds to flow out each month while reinvesting the rest. The process has been dubbed ‘quantitative tightening’, as opposed to quantitative easing of recent years.
Goldman’s forecast is in line with market expectations, which project an almost 80% chance of a first rate hike in March and a near 50-50 chance of a fourth hike by December, according to the CME’s FedWatch tool. Some even see a not insignificant probability of nearly 23% of a fifth increase this year.
