The Federal Reserve is likely to raise interest rates four times this year in response to high inflation and low unemployment, Goldman Sachs advised clients on Sunday evening.
Rate hikes from the Fed will raise the cost of borrowing, on everything from mortgages and car loans to credit cards.
The new forecast represents an increase from Goldman’s previous call for three rate hikes in 2022. The Wall Street bank also now expects the Fed to begin shrinking the size of its $8.8 trillion balance sheet in July, compared with December previously.
“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 Sachs economists wrote in a note to clients.
Despite the rapid economic recovery and high inflation, the Fed has kept interest rates at rock-bottom levels.
The central bank recently signaled plans to raise interest rates three times this year. Investors have priced in an 81% chance of at least three interest rate hikes in 2022, according to the CMEGroup’s FedWatch tool. And there is now a 53% chance of four or more rate hikes, compared with about 30% a month ago.
To explain its call for four rate increases, Goldman Sachs cited its forecast for inflation to still be running “far above” the Fed’s target by the summer as well as continued progress in the jobs market. The bank noted that although payroll growth in December missed expectations, that figure will likely get revised higher. Other indicators, including the 3.9% unemployment rate, point to strong demand for workers.
“The US labor market continues to make rapid progress,” the Goldman Sachs economists wrote.
Recent economic indicators, including a record number of workers quitting their jobs, suggest that “the remaining employment shortfall relative to February 2020 mostly reflects labor supply shortages, not inadequate demand,” the economists wrote.
Thomas Barkin, president of the Richmond Federal Reserve Bank, said Friday it’s “conceivable” the Fed raises interest rates in March.
“If you’ve got an economy that continues the levels of unemployment that we’re living through now, which of course is very healthy, with price pressures elevated, I think according to our mandate and framework, we need to move toward normalization,” Barkin told The Wall Street Journal. The Richmond Fed president does not have a vote this year on the Fed’s rate-setting committee.
Federal Reserve Chairman Jerome Powell will face questions from lawmakers on interest rate hikes and inflation, among other topics, during his Tuesday confirmation hearing.