Hike rates

Persistent inflation and tight labor market will push Fed to hike rates 4 times in 2022: Goldman Sachs

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Inflation intensifies for longer and a further tightening of the labor market will force the Federal Reserve hike rates four times instead of three in 2022, according to a new forecast from Goldman Sachs.

Jan Hatzius, chief economist at Goldman, wrote in a note on Sunday that the investment bank was forecasting a fourth rate hike of 25 basis points in December this year, from a previous projection of three. The move would put the target federal funds in a range of 1.0% to 1.25% by the end of 2022. Currently, the benchmark interest rate is between 0% and 0.25%.

Hatzius wrote that the hawkish signals from the recently released minutes of the Fed’s policy meeting in December (pdf), with pantyhose inflation and the continued recovery in the labor market suggest a faster path to tightening monetary policy.

The minutes of the Fed meeting show that members of the Federal Open Market Committee (FOMC) felt that current economic conditions “included a stronger economic outlook, higher inflation and a larger balance sheet and could therefore justify a potentially faster rate of normalization of key rates “.

Fed officials also said they would likely begin the process of reducing the central bank’s $ 8.8 trillion balance sheet sooner, with the minutes saying that “participants felt that the appropriate time for the liquidation of the results would probably be closer to that of the take-off of key rates than in the Committee’s previous experience.

At the same time, some Fed officials cited in the minutes preferred to rely more on balance sheet cuts rather than a rate hike to limit the flattening of the yield curve. The Fed’s dot plot, which is part of its revised summary of December economic projections (pdf), forecasts three rate hikes in 2022, up from that implied in the September dot plot, but lower than Goldman’s recently revised forecast.

Soaring inflation in the United States, which reached its highest level in 39 years in the past 12 months, has prompted the Fed to accelerate its policy normalization. The Labor Department will release its Consumer Price Index (CPI) figures on Jan. 12, which are a measure of inflation from the perspective of end users of goods and services. Consensus forecasts expect the rate of consumer price inflation over the year in December accelerated to 7%, from 6.8% the previous month.

“The consensus has moved,” Allianz chief economic adviser Mohamed El-Erian told CNBC’s Squawk Box in a recent interview.

“You have Goldman, you have JP Morgan, you have Evercore, you have a number of analysts now saying the Fed is going to hike rates four times this year,” he said, adding that he believed that these predictions would come true.

El-Erian added that he would not be surprised to see the consumer inflation rate for the year in December exceed 7% and “well above 5%” on the so-called inflation measure. underlying, which excludes volatile categories. energy and food.

Consensus forecasts predict Core CPI inflation over the 12 months through December to stand at 5.4%.

“The Fed has an inflation problem and it is going to have to react,” El-Erian added.

The Fed predicts the core PCE, a separate but similar indicator to the CPI’s measure of inflation, to stand at 4.4% for 2021 and 2.7% for 2022, from 3.7% and 2.3% in the September projections.

Through Tom ozimek

Tom Ozimek has extensive experience in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he’s ever heard is from Roy Peter Clark: “Hit your target” and “leave the best for last”.