Goldman Sachs now predicts seven interest rate hikes by the Fed this year

Published Fri, Feb 11 20227:32 AM ESTUpdated Fri, Feb 11 20228:52 AM EST

Goldman Sachs has joined the call for a tighter Federal Reserve, now seeing rate hikes at every meeting through the end of 2022. Following a report that showed inflation running even hotter than Wall Street expected , Goldman's economists say they expect seven 25 basis-point rate hikes this year. A basis point is equal to 0.01%. That forecast reflects market expectations, which turned sharply after the Labor Department reported Thursday that the consumer price index was up 7.5% for the 12-month period through January. "There are good reasons to think that wage and price pressures will calm down and the economy will avoid a wage-price spiral. But there is enough ambiguity to raise concern," Goldman economists David Mericle and Jan Hatzius said in a note Thursday evening. "Inflation should moderate this year as pandemic supply-demand imbalances fade and goods prices normalize, but the timing of that is uncertain, and the recent inflation trend is very firm," they added. Goldman expects the Fed to enact its first rate hike in March, and then to continue through each of the subsequent six meetings through 2022. Market pricing Friday morning indicated an 85% chance of a 50 basis-point move next month, but Goldman thinks the Fed will stick to its usual hiking pattern of 25 basis points each. The economists also pointed out they don't anticipate an intermeeting rate hike, something they note hasn't happened since 1994. In the early days of the pandemic crisis, the Fed e nacted two emergency rate moves , but they were reductions, not increases. Also, the Fed has not started a rate-hiking cycle with a 50 basis-point move since the early 1980s. In all, Goldman expects inflation to calm down as the year goes on, but anticipates the Fed having to act soon. While they see it as unlikely, the economists did not take the idea of a half-percentage-point hike off the table. "We could imagine the FOMC concluding that even a meaningful risk of an outcome as serious as a wage-price spiral requires a more aggressive and immediate response," Mericle and Hatzius wrote. "In that case, we think a 50bp hike at the March meeting or some subsequent meeting would be more likely than an intermeeting hike." The Goldman call comes two weeks after Bank of America said it expects seven hikes this year , the first Wall Street firm to go that far. Market pricing now sees a 69% chance of seven hikes, and even envisions about a 37% probability of eight moves, according to the CME . Still, Goldman thinks the hikes only will pull forward what the Fed had intended to do in the next several years, rather than reflect longer-term higher rates. The firm sees the terminal funds rate in a 2.5% to 2.75% range, 25 basis points lower than what BofA is predicting. Fed projections released in December anticipate the terminal rate at 2.5%.

The Federal Reserve building in Washington, January 26, 2022.

Joshua Roberts | Reuters

Goldman Sachs has joined the call for a tighter Federal Reserve, now seeing rate hikes at every meeting through the end of 2022.