Hike rates

Goldman economist sees chance that the Fed will have to raise rates beyond 4%

The Federal Reserve may need to raise interest rates “significantly” higher than it currently plans to cool an overheated U.S. economy, the chief economist at Goldman Sachs Group Inc. said, Jan Hatzius.

“If the economy doesn’t slow down and if we, in particular, don’t get a big enough slowdown in job growth, then you would be looking at something that could go much higher, in the 4% range and more,” he said. said Friday in an interview with Bloomberg Television.

This is not Goldman’s expectation, he noted, while warning that it will take “sophisticated footwork” on the part of the Fed to achieve a soft landing in the middle of the crisis. highest inflation in 40 years and the strongest labor market since the 1950s.

“Our baseline is that by the middle of 2023 we’ll be at just over 3%, but there are obviously risks around that,” he said in the interview with Lisa Abramowicz. , Tom Keene and Jonathan Ferro. “On the downside, if we get a much deeper tightening of financial conditions than they want. On the upside, if the economy remains stronger or you fail to secure further tightening of financial conditions.

The Fed raised rates by a quarter of a point last month to a target range of 0.25% to 0.5% and indicated in its point forecast that it plans to raise rates to 1.9 % by the end of 2022 and 2.8% by the end of 2023. .

Since then, officials have said they stand ready to act more quickly if needed to rein in inflation, including hiking by half a point at their next meeting on May 3-4. Minutes from their March 15-16 policy meeting showed many had preferred to go this far last month, but opted for a more cautious quarter-point hike in light of the invasion Ukraine by Russia and were open to a half-point rate hike. one or more upcoming meetings.

“The Fed’s objective is to bring about a gradual tightening of financial conditions, otherwise it will not achieve its stated goals of stabilizing the economy near full employment but not in an overheated state. “, did he declare. .

The consumer price index climbed 7.9% in February from a year earlier, the highest since 1982. The Fed’s 2% inflation target is based on a separate measure, the personal consumption expenditure price index, which rose 6.4% in the 12 months to February. Meanwhile, U.S. labor markets remain strong, with the unemployment rate dropping to 3.6% last month as employers added 431,000 jobs.

“In an ideal world, what the Fed would do is slow the economy to a degree that causes companies to delay or suspend some of their expansion plans, thereby reducing those extremely high open positions, not slowing it down. to the point of causing substantial layoffs,” he said. “It’s going to require sophisticated footwork.”

Bloomberg Opinion columnist and former New York Fed Chairman William Dudley wrote in an article Thursday that the central bank will need to inflict more losses on stock and bond investors to rein in inflation.