By Zachary Halaschak
Goldman Sachs predicted that the Federal Reserve will take an even more aggressive approach to raising interest rates in 2022 than previously anticipated as it scrambles to catch up with inflation.
The financial service giant’s chief economist, Jan Hatzius, said in a report to clients that the central bank will likely opt for seven quarter-percentage-point hikes at consecutive meetings of the Federal Open Market Committee.
In January, just a few weeks ago, Goldman forecast up to four rate hikes. On Thursday, the government reported that consumer prices soared by 7.5% in the 12 months ending in January, the fastest pace of inflation since 1982.
The report immediately startled investors who fear more aggressive rate hikes, and the stock market took a hit.
The report led some Fed watchers to think that the central bank might take the unusual step of announcing a surprise hike in its interest rate target even before its March meeting, the kind of move that the Fed usually reserves for emergencies. The Fed has held the target near zero during the pandemic in an effort to boost economywide spending.
Others anticipated that, instead, Fed officials might opt to wait until March but then raise the target by a half-percentage-point rate rather than the typical quarter percentage point, in effect implementing two rate hikes at once. It would be the first time in more than two decades that the Fed took such a drastic move. On Friday, bond market prices indicated that investors do expect the Fed to hike by a half percentage point by March.
Still, Goldman thinks the Fed will stick to a more incremental approach.
“Most Fed officials who have commented have opposed a 50 basis points hike in March,” researchers said in their note. “We therefore think that the more likely path is a longer series of 25 basis points hikes instead.”
James Bullard, the president of the Federal Reserve Bank of St. Louis, said he supported aggressive central bank action after Thursday’s inflation report. Bullard, who votes on Fed monetary policy, indicated that he is supportive of a half-point hike.
“I’d like to see 100 basis points in the bag by July 1,” Bullard told Bloomberg. “I was already more hawkish, but I have pulled up dramatically what I think the committee should do.”
The Goldman researchers said they are keeping their eye on the others who craft monetary policy for signs that the Fed could move more decisively right out of the gate come March.
“We would consider changing our forecast if other participants join him, especially if the market continues to price high odds of a 50 basis points move in March,” the researchers wrote.
Prices have risen across the board, but they are being led by considerable increases in used car prices and the cost of energy. Used car prices have increased by an astounding 40.5% since last year, while energy prices soared by 27%. Food prices are also up significantly, dinging households every time they go to the grocery store.
The Fed’s target is for inflation to run at 2%, although it uses the personal consumption expenditure price index, rather than the consumer price index, as its gauge. While it remains high, PCE inflation is running a bit lower than CPI inflation, at 5.8%.
For months now, Fed Chairman Jerome Powell and the Fed have been under political pressure to act more assertively. Several Republican lawmakers have been pushing the central bank to tighten its monetary policy and raise rates in light of the higher inflation.