Goldman Sachs has increased its estimate of the number of Federal Reserve interest rate hikes this year to four from three, as the Fed has taken a more hawkish policy stance.
In the minutes of its December meeting, released Wednesday, the Fed said rampant inflation and a red-hot job market could necessitate rate hikes “sooner or at a faster pace than participants had earlier anticipated.”
As for Goldman, its chief economist Jan Hatzius wrote in a commentary Sunday that “declining labor market slack has made Fed officials more sensitive to upside inflation risks and less sensitive to downside growth risks.”
The unemployment rate fell to 3.9% in December from 4.2% in November. And consumer prices soared 6.8% in the 12 months through November, a 39-year high.
“Although the [Fed’s] minutes mostly confirmed the message sent by Chair Powell in the December 15 press conference, the committee’s discussion around normalization of the balance sheet did convey a greater sense of urgency than we had expected,” Hatzius said.
Normalization refers to shrinking the Fed’s $8.8 trillion dollar balance sheet.
And then San Francisco Fed President Mary Daly suggested balance sheet reduction might start after just one or two rate hikes, Hatzius said.
“We are therefore pulling forward our [balance-sheet] runoff forecast from December to July, with risks tilted to the even earlier side,” he said.
“With inflation probably still far above target at that point, we no longer think that the start to runoff will substitute for a quarterly rate hike,” Hatzius said.
So now he sees one rate increase per quarter this year, pushing the federal funds rate up to 2.5% to 2.75%.