Goldman Sachs analysts say the Federal Reserve could raise interest rates more than expected this year as it aims to curb the ongoing inflation spurt.
Goldman’s current projections call for four rate hikes in 2022, with hikes coming in March, June, September and December. But with inflation at its highest level in four decades, the central bank could take an even more hawkish policy stance, analysts said in a note to clients over the weekend.
“We see a risk that the [Federal Open Markets Committee] will want to take tightening measures at every meeting until that picture changes,” the Goldman Sachs analysts said. “This raises the possibility of one hike, or an earlier announcement of the balance sheet in May, and more than four hikes this year.”
The Fed is expected to tighten monetary policy in the coming months, working to include rate hikes and reducing the nearly $9 trillion in central bank obligations. The last central bank rate hike took place in December 2019, months before the onset of the COVID-19 pandemic.
In their analysis, Goldman Sachs economists noted various conditions contributing to high inflation, including imbalances between supply and demand, strong wage growth and higher rental prices.
“We also see a growing chance that the FOMC will want to take tightening action at its May meeting, when the inflation scoreboard is expected to remain quite warm,” Goldman’s note said. “If so, that could ultimately lead to more than four rate hikes this year.”
The Fed will meet Tuesday and Wednesday this week to assess its policy. Fears of rate hikes contributed to volatility in U.S. equity indices, with the market posting its worst week since March 2020 last week.
Fed Chairman Jerome Powell acknowledged the likelihood of multiple rate hikes earlier this month during his renomination hearing before a Senate committee.
“If we see inflation persisting at high levels for longer than expected, if we need to raise interest rates more over time, we will,” Powell said. “We will use our tools to bring down inflation.”