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Goldman predicts U.S. Fed will hike interest rates 7 times this year to rein in highest inflation since 1982

February 11, 2022, 4:32 AM UTC

Goldman Sachs Group Inc.’s economists now expect the Federal Reserve to raise interest rates seven times this year to contain surging U.S. inflation, up from the five hikes they had seen earlier.

The change of view comes after the U.S. consumer price index report for January showed a 7.5% annual increase, the biggest since 1982. Gains were broad-based, extending beyond food and energy to categories including household furnishings and health insurance.

Goldman’s economists led by Jan Hatzius are tipping the Fed will move by 25 basis points at seven consecutive meetings of the Federal Open Market Committee.

While there’s a case to be made for a 50 basis point hike in March given the combination of very high inflation, hot wage growth and high short-term inflation expectations, the indications from policy makers so far are pointing to more incremental moves, according to the Goldman analysts. 

“Most Fed officials who have commented have opposed a 50 basis points hike in March,” the Goldman analysts wrote in a note. “We therefore think that the more likely path is a longer series of 25 basis points hikes instead.”

Federal Reserve Bank of St. Louis President James Bullard said he supports raising interest rates by a full percentage point by the start of July—including the first half-point hike since 2000—in response to the hottest inflation in four decades.

“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 Goldman analysts said.

The shift by Goldman mirrors remarks by former U.S. Treasury Secretary Lawrence Summers, who last week told Bloomberg Television that investors should brace for the Fed to potentially raise interest rates at all seven remaining policy meetings this year and even for it to hike by more than a quarter point in one go.

Global banks have been ramping up their expectations for an aggressive Fed hiking cycle.

Base Case

Deutsche Bank AG economists said the inflation data means a 50 basis point hike in March is now their base case.

“More limited evidence of waning inflation pressures in the back half of the year suggest that the Fed will continue their more aggressive response for longer,” economists at the German bank said in a note. They tip further moves of 25 basis points at every meeting this year except for November, bringing the total increase in the Fed funds rate in 2022 to 175 basis points.

Nomura Holdings Inc. said they are doubling down on their call for a half-point increase in March, while Standard Chartered Plc said the inflation data has unleashed a firestorm of Fed speculation with the risk that policy makers front load the tightening cycle. 

Still, the hiking cycle could threaten the global recovery, Deutsche’s economist cautioned.

“This more aggressive policy response raises downside risks to growth,” they wrote. “Engineering a soft landing for the economy is never easy.”

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