Goldman Sachs Raises Fed Rate Expectations Due to High Inflation, Low Unemployment

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A Fed rate hike will raise the cost of borrowing everything from mortgages to auto loans to credit cards.

The new forecast is an increase from Goldman’s previous call for three rate hikes in 2022. Wall Street banks also now expect the Fed to begin shrinking its $8.8 trillion balance sheet in July, compared with the previous December.

“We continue to see rate hikes in March, June and September, and have now hiked rates in December for a total of four hikes through 2022,” Goldman economists wrote in a note to clients.

The Federal Reserve has kept interest rates at rock-bottom levels despite a rapid economic recovery and high inflation.

Inflation, explained: Why prices keep rising and who's to blame
The central bank recently said it plans to raise interest rates three times this year. Investors see an 81% chance of at least three rate hikes in 2022, according to CMEGroup’s FedWatch tool. There is now a 53% chance of four or more rate hikes, up from about 30% a month ago.
To explain its call for four rate hikes, Goldman cited its forecast for inflation to remain “well above” the Fed’s target through the summer, as well as continued progress in the labor market. The bank noted that although employment growth in December was lower than expected, the figure could be revised higher. Other indicators, including an unemployment rate of 3.9%, pointed to strong demand for workers.

“The U.S. labor market continues to develop rapidly,” Goldman economists wrote.

The economists wrote that recent economic indicators, including a record number of workers quitting their jobs, suggest that “the remaining employment deficit relative to February 2020 primarily reflects a shortage of labor supply rather than a lack of demand.”

Richmond Federal Reserve Bank President Thomas Barkin said on Friday that it was “conceivable” for the Fed to raise interest rates in March.

“If your economy continues to have the level of unemployment that we’re experiencing right now, that’s certainly very healthy, and with price pressures going up, I think we need to move toward normalization based on our mandate and framework,” Barkin told The Wall Street Journal. daily”. The Richmond Fed president does not have a vote on the Fed’s rate-setting committee this year.

At Tuesday’s confirmation hearing, Fed Chairman Jerome Powell will face questions from lawmakers on topics such as interest rate hikes and inflation.



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