According to Goldman Sachs’ analysis, an increase in inflation may cause the Federal Reserve (Federal Reserve) to raise interest rates more aggressively than expected this year.
With the market already expecting four quarter-percentage-point hikes this year, Goldman economist David Mericle said the omicron spread is aggravating price increases and could push the Fed into a faster pace of rate increases.
Mericle stated in Saturday’s note to clients that “our baseline forecast calls for four increases in March, June and September” But we are concerned about the possibility that this will happen. [Federal Open Market Committee]Until the inflation picture is changed, we will continue to tighten our stance at each meeting.
It comes only a few days before the policymaking team’s report two-day meetingStarting Tuesday
Although markets expect that the meeting will not result in any interest rate changes, they believe that the committee would. a hike coming in March. It will mark the first rise in benchmark rates by the central bank since December 2018.
In order to stop spike inflation which is currently running at a rapid pace, raising interest rates could be an option. its highest 12-monthTempo in almost 40 years
Mericle stated that the economic problems resulting from Covid have increased imbalances between constrained supply and booming demand. Wage growth has continued to rise at high rates, in particular at lower-paying job positions. However, enhanced unemployment benefits are over and the labor force should be loosening up.
Mericle said that “we see the risk that FOMC will want some tightening action every meeting until that situation changes.” This raises the possibility that there will be a May hike, or an earlier announcement on balance sheets in May. There could also be more than four increases this year.
CME data shows that traders are pricing in a nearly 95% probability of a rate rise at March’s meeting and more than 85% likelihood of four moves by 2022.
The market is also starting to lean towards a fifth rate hike in this year’s fiscal year. This would mark the most aggressive Fed since the beginning of the 21st century, when investors were trying to curb the dotcom bubble. The CME’s FedWatch gauge shows that the odds of a fifth increase in interest rates have increased to 60%.
The Fed has also increased rates. winding down its monthly bond-buying programWith March being the date for the end of an effort which has nearly doubled central bank’s balance sheet to $9 trillion, it is now March. Some market participants speculate that the Fed might close the program next week at its meeting. Goldman doesn’t expect this to be the case.
However, the Fed may be able to give more information about when it will begin unwinding its bond holdings.
Goldman predicts this process will start in July, and it will be completed in 100 billion monthly installments. The process is expected to run for 2 or 2½ years and shrink the balance sheet to a still-elevated $6.1 trillion to $6.6 trillion. Mericle stated that the Fed will likely allow some of the proceeds from maturing bonds each month to be rolled off rather than sell outright.
However, forecasts are now at risk due to the unexpectedly high and sustained inflation run.
Mericle stated that there is a growing likelihood that the FOMC would want to tighten its action during the May meeting. This will be when inflation remains hot. This could eventually lead to more rates being raised this year than the current four.
There are only a handful of key economic data points available this week. They will however be released after the Fed meets.
Fourth-quarter GDP data is available Thursday. Economists are expecting growth to be around 5.8%. The Fed’s favorite inflation gauge, personal consumption expenditures prices, will release Friday. It is forecasted to have a 0.5% month-over year increase as well as a 4.8% annual gain.