Sticky Inflation and Job Market Tightening Will Push Fed to Hike Rates 4 Times in 2022: Goldman Sachs

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Inflation that gets hotter for longer and more labor market tightening will force the Federal Reserve to raise interest rates four times instead of three in 2022, according to a new Goldman Sachs forecast.

Jan Hatzius, chief economist at Goldman, wrote in a note on Sunday that the investment bank expects to raise interest rates by 25 basis points in December of this year, up from a previous forecast of three. This move will put the target federal funds in a range of 1.0-1.25 percent by the end of 2022. Currently, the benchmark interest rate is between 0-0.25 percent.

Hatzius writes that optimistic signals from the recent minutes from the Federal Reserve’s December monetary policy meeting (pdf), combined with steady inflation and an ongoing recovery in the labor market, point to a faster path to monetary tightening.

The Fed meeting minutes show that FOMC members judged that current economic conditions “include stronger economic expectations, higher inflation, and a larger balance sheet, and thus can ensure an acceleration of the pace of policy rate normalization.”

Fed officials also said they were likely to begin the process of reducing the central bank’s $8.8 trillion balance sheet sooner, with the minutes noting that “participants deemed the appropriate timing for the balance sheet round likely to be closer to the appropriate timing for an interest rate hike. than in the previous experience of the committee.”

At the same time, some Fed officials indicated in the minutes that they would prefer to rely more on balance sheet cuts rather than raise rates to limit the flattening of the yield curve. The Fed’s so-called point plot, part of its December revised Summary of Economic Outlook (pdf), projects three price increases in 2022, higher than those included in the points chart in September but lower than Goldman’s newly revised forecast.

Rising inflation in the United States, which in the 12 months through November rose to a 39-year high, has put pressure on the Federal Reserve to speed up policy normalization. On January 12, the Labor Department will release Consumer Price Index (CPI) numbers, which are a measure of inflation from the perspective of end users of goods and services. Consensus forecasts expect year-round consumer price inflation to accelerate in December to 7 percent, up from 6.8 percent the previous month.

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

“You have Goldman, you have JPMorgan, you have Evercore, you have a number of analysts who are now saying the Fed will raise rates four times this year,” he said, adding that he believed those expectations would come true.

El-Erian added that he would not be surprised to see the December consumer inflation rate above 7 percent and “more than 5 percent” on the so-called core inflation gauge, which excludes volatile categories. of energy and food.

The consensus forecast predicts that the core CPI inflation rate in the 12 months through December will be 5.4 percent.

“The Federal Reserve has an inflation problem and it will have to respond,” El-Erian added.

The Fed expects the core personal consumption expenditures index, a separate but similar measure of inflation to the CPI, to come in at 4.4 percent for 2021 and 2.7 percent for 2022, up from 3.7 percent and 2.3 percent in the September forecast.

by Tom Ozymec

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

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