Inflation will warm up longer and further tightening in the labor market will force Federal Reserve raise 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 forecast a fourth rate hike of 25 basis points in December this year, down from an earlier projection of three. The move would put the target federal funds in a range between 1.0 and 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 December policy meeting (pdf), with tights inflation and the continued recovery in the labor market, suggest a faster path for monetary policy tightening.
The Fed’s meeting minutes show that members of the Federal Open Market Committee (FOMC) felt that current economic conditions “include a stronger economic outlook, higher inflation and a larger balance sheet and therefore may warrant a potentially faster pace of policy rate normalization”.
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 stating that “participants deemed the timing appropriate for the liquidation of the balance sheet would probably be closer to that of raising the policy rate than in the past experience of the committee.
At the same time, some Fed officials cited in the minutes preferred to rely more on balance sheet reductions rather than rate hikes to limit yield curve flattening. The Fed’s so-called dot chart, which is part of its revised summary of December economic projections (pdf), predicts three rate hikes in 2022, up from the one implied in the September dot chart, but lower than Goldman’s recently revised forecast.
Soaring US inflation, which in the 12 months to November hit its highest level in 39 years, put pressure on the Fed to accelerate policy normalization. The Labor Department will release its Consumer Price Index (CPI) numbers on January 12, which measures inflation from the perspective of end users of goods and services. Consensus forecasts expect the rate of consumer price inflation for the year in December accelerated to 7%, from 6.8% the previous month.
“The consensus has evolved,” Allianz chief economic adviser Mohamed El-Erian told CNBC’s Squawk Box in a recent interview.
“You’ve got Goldman, you’ve got JP Morgan, you’ve got Evercore, you’ve got a number of analysts now saying the Fed is going to raise rates four times this year,” he said, adding that he believed that these predictions would materialize.
El-Erian added that he would not be surprised to see consumer inflation for the year in December exceed 7% and “well above 5%” on the so-called inflation measure. core, which excludes volatile categories. energy and food.
Consensus forecasts predict core CPI inflation over the 12 months to December is expected to be 5.4%.
“The Fed has an inflation problem and they are going to have to react,” added El-Erian.
The Fed expects the core PCE, a separate but similar gauge to the CPI inflation measure, to come in at 4.4% for 2021 and 2.7% for 2022, down from 3.7% and 2, 3% in the September projections.
Through Tom Ozimek
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