The Federal Reserve is expected to raise interest rates more than expected in 2022 as the U.S. economy grapples with runaway inflation and tough labor conditions, Goldman Sachs analysts said in a note to investors on Sunday.
The Wall Street bank said it now expects four rate hikes, down from three in its previous projections. Additionally, Goldman Sachs predicts the Fed will begin shrinking the size of its balance sheet as early as July, reducing its holdings of nearly $9 trillion in bonds.
“The slowing labor market has made Fed officials more sensitive to upside inflation risks and less sensitive to downside growth risks,” Goldman Sachs chief economist Jan Hatzius said. according to CNBC. “We continue to see hikes in March, June and September, and have now added a hike in December for a total of four in 2022.”
Goldman revised its outlook just days before the Bureau of Labor Statistics released updated data for the consumer price index, a key gauge of inflation. The consumer price index is expected to show a 7.1% year-on-year increase when December data is released on Wednesday, according to Dow Jones.
The figure would mark the largest annual spike in four decades.
So far, Federal Reserve officials have indicated they expect to raise interest rates thrice in 2022. The central bank’s plan to tighten monetary policy, after months of adopting methods intended to support the US economy during COVID-19, has spooked investors in recent days.
A rate hike would be the Fed’s first since the pandemic began in March 2020. The current federal funds rate is 0-0.25%.
Minutes from the Federal Reserve’s December FOMC meeting indicated that officials could raise interest rates faster than expected this year due to tough labor conditions. The December jobs report showed an employment rate of just 3.9%, which is what the Fed considers “peak employment.”
Deutsche Bank also forecast four rate hikes in 2022, citing data from the latest jobs report, according to Reuters.