Goldman Sachs has brought forward its forecast by a year to July 2022 for the first post-pandemic U.S. interest rate increase, with the investment bank predicting that persistently high inflation will force the Federal Reserve to roll back its stimulus measures more aggressively.
“The main reason for the change in our liftoff call is that we now expect core PCE inflation to remain above 3 percent—and core CPI inflation above 4 percent—when the taper concludes,” Goldman’s chief economist, Jan Hatzius, wrote in a client note.
Fed policymakers are expected to announce plans to start tapering the central bank’s $120 billion in monthly purchases of Treasurys and mortgage-backed securities at the end of their two-day policy meeting on Nov. 3.
The Commerce Department announced on Oct. 29 that the core personal consumption expenditures (PCE) inflation index, which excludes the volatile categories of food and energy and is the Fed’s preferred inflation gauge, rose in the year through September at 3.6 percent. This figure matched the June, July, and August figures, and showed that September’s rate of inflation remained stuck at its highest annual level in 30 years for the fourth month in a row and well above the Fed’s target of 2 percent.
While the timing and pace of tapering haven’t been decided, St. Louis Fed President James Bullard has endorsed a November start for the dial-down in asset purchases, telling CNBC in October that he would like to wrap up the taper by the first quarter of 2022 so that if inflation stays high or moves even higher, the central bank could raise rates “in the spring or summer if we had to do so.”
At the most recent policy meeting in September, Federal Reserve Chairman Jerome Powell said the “substantial further progress” taper test for employment “is all but met” and that scaling back the asset buys “may soon be warranted.”
At their September meeting, members of the Federal Open Market Committee (FOMC) voted to keep rates unchanged but released updated economic projections (pdf), including the so-called dot plot that charts the 18 FOMC members’ future expectations for rates, which showed a growing appetite for a faster rate increase schedule.
While the dot plot showed relatively little change in interest-rate-hike expectations for 2022, FOMC members raised their assessment significantly for the target federal funds rate for 2023 in the September dot plot, compared to one issued in June (pdf).
While five members in June thought rates should remain in the zero-to-0.25 percent range in 2023, that number dropped to just one in September. By the end of 2023, the updated September median dot anticipates three to four total rate increases, compared to two boosts expected in the June projection.
The updated projections came as inflation has been running far hotter than the Fed’s 2 percent target, posing a challenge for policymakers who are wary of pulling back support before the labor market shows sufficient recovery.
FOMC members predicted in September that the annual PCE index inflation rate for this year would hit 4.2 percent, up from the 3.4 percent they predicted in June. Next year’s projected inflation rate inched up to 2.2 percent from 2.1 percent, while the 2023 rate remained unchanged at 2.2 percent.
Reuters contributed to this report.