The Federal Reserve is likely to hike interest rates more than expected in 2022 as the US economy grapples with surging inflation and tight labor conditions, Goldman Sachs analysts said in a note to investors on Sunday.
The Wall Street bank said it now expects four rate hikes this, up from three hikes in its previous projections. Additionally, Goldman Sachs projects the Fed will start to slash the size of its balance sheet by as early as July, shrinking its holdings of nearly $9 trillion in bonds.
“Declining labor market slack has made Fed officials more sensitive to upside inflation risks and less sensitive to downside growth risks,” Goldman Sachs’ chief economist Jan Hatzius said, according to CNBC. “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 revised its outlook just days before the Bureau of Labor Statistics releases updated data for the consumer price index, a key gauge for inflation. The consumer price index is expected to show a year-over-year increase of 7.1 percent when December data is released on Wednesday, according to Dow Jones.
The figure would mark the sharpest annual spike in four decades.
So far, Federal Reserve officials have indicated they expected to raise interest rates three times in 2022. The central bank’s plan to tighten monetary policy, after months of embracing methods meant to bolster the US economy during the COVID-19, has spooked investors in recent days.
A rate hike would be the Fed’s first since the pandemic began in March 2020. The current federal funds rate is 0 to 0.25 percent.
Minutes from the Federal Reserve’s December FOMC meeting indicated officials could raise interest rates faster than expected this year due to tight labor conditions. The December jobs report showed an employment rate of just 3.9 percent, in line with what the Fed considers to be “maximum employment.”
Deutsche Bank also projected four rate hikes in 2022, citing data from the latest jobs report, according to Reuters.