Prepare for serious increases in the cost of borrowing.
Searing wage inflation and an exceptionally tight labor market will lead the Federal Reserve to raise its benchmark interest rate 11 times by the end of the year, according to a new report from Wall Street bank Goldman Sachs .
“A very high inflation path in 2022 should easily make the case for steady rate hikes in the remaining seven FOMCs. [Federal Open Market Committee] meetings,” the report said. “Given our higher inflation forecast for 2023, we now expect four additional quarterly increases next year (compared to three previously.)” [My empahsis.]
That’s a total of 11 borrowing cost increases over the next 22 months, if Goldman is correct.
The report suggests that the base interest rate could go up to 3%.
Goldman’s forecast should worry both stock and bond investors.
Bond prices tend to fall when interest rates rise. This is truer for longer-term bonds than for shorter-term bonds. In other words, 10-year T-notes will be more impacted than 2-year T-notes.
For equities, we have already seen a sort of early reaction to the possibility of substantial rate hikes. The S&P 500 began to fall at the New Year’s break. The tech-rich NASDAQ
In both cases, the impact seems to have been greater on stocks that had no dividends.
However, the most worrying part of Goldman’s thesis is that there will be more upside than the wizards on Wall Street previously expected. In other words, the Fed is now likely to be more aggressive in fighting inflation.
This goes somewhat against the people I spoke to recently who seem to believe that inflation could peak and therefore the Fed will have to do less than expected.