Goldman raises Fed rate hike forecast after Powell's hawkish stance
Fed likely to raise interest rates well into restrictive territory: Goldman Sachs
Federal Reserve still unsure on where inflation will settle: Panel
Barron’s markets editor Ben Levisohn, Barron’s reporter Carleton English, and Barron’s associate editor Jack Hough discuss recent market trends, inflation, and the IRS beefing up its auditing on ‘Barron’s Roundtable.’
Goldman Sachs strategists see the Federal Reserve charting an even more aggressive course of interest rate increases after the U.S. central bank took an increasingly hawkish stance during its two-day meeting.
The bank's economists — led by Jan Hatzius — said in an analyst note on Thursday that they expect the Fed to continue raising the benchmark federal funds rate until it hits a target range of 4.5% to 4.75%, up from their previous estimate of 4% to 4.25%. That includes rate hikes of 75 basis points in November, 50 basis points in December and 25 basis points in February.
The projections come shortly after Fed policymakers voted unanimously to approve a third consecutive 75-basis-point interest rate hike.
In addition to the large rate hike, Fed officials laid out an aggressive path of rate increases for the remainder of the year. New economic projections released after the two-day meeting show policymakers expect interest rates to hit 4.4% by the end of the year, suggesting that another three-quarter percentage point increase is on the table.
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U.S. Federal Reserve Chair Jerome Powell attends a news conference following a Federal Open Market Committee meeting in Washington, D.C., on Wednesday. (Chen Mengtong/China News Service via Getty Images / Getty Images)
The rate hike decision and the latest economic projections underscore just how committed the Fed is to wrangling inflation under control, even if that means risking an economic recession.
"We have got to get inflation behind us," Federal Reserve Chairman Jerome Powell said during a post-meeting press conference in Washington. "I wish there were a painless way to do that. There isn’t."
The Goldman economists said that Powell's comments — which they described as "somewhat hawkish" — were behind the more aggressive forecast.
The Marriner S. Eccles Federal Reserve building in Washington, D.C. (Al Drago/Bloomberg via Getty Images / Getty Images)
"His account of the recent economic data put more emphasis on the distance to go in reversing overheating than on the progress so far and downplayed some encouraging news," Hatzius wrote.
Despite the slew of aggressive rate increases, however, inflation has remained stubbornly high.
It ran even hotter than expected last month, with the consumer price index, a broad measure of the price for everyday goods that includes gasoline, groceries and rents, increasing 0.1% in August from the previous month, dashing hopes for a slowdown. On an annual basis, inflation is running at 8.3% — a nearly 40-year high.
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But the efforts to combat inflation carry a potential risk of recession, with a growing number of economists and Wall Street firms forecasting an economic downturn this year or next.
"The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer," Powell said Wednesday. "Nonetheless, we’re committed to getting inflation back down to 2%. We think a failure to restore price stability would mean far greater pain."