Goldman Sachs: no more than four rate hikes in 2022


The spread of the Omicron variant will feed further bullish pressure on inflation, which could force the Fed to raise fed funds rates more than four times, during 2022. David Mericle, economist at Goldman Sachs, said in a note ahead of the upcoming meeting of the FOMC - the Fed's monetary policy arm-which begins tomorrow, January 25, and ends the day after tomorrow, January 26.

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"Our baseline scenario is four (monetary) tightening in the months of March, June, September and December - wrote Mericle, in the Note reported by the CNBC website - but we see the risk that the Fomc will decide to act in a restrictive sense at each of the scheduled meetings (on the calendar, therefore also in May), until the inflation picture changes".

Markets are pricing in a first tightening at the FOMC meeting in March - in which case, it would be the first rate hike since December 2018. Some estimate that rates could be raised by as much as 50 basis points in March.

Traders price the rate hike in March with a probability of almost 95%, and generally four monetary tightening throughout 2022 with a chance of more than 85%, according to CME data.

Expectations, thanks to the growth of inflation at the strongest pace in 40 years, are becoming more bullish, so much so that the probability of seeing five rate hikes, again according to the Fedatch

"We also see a good chance that the Fomc will decide to intervene in a restrictive way at the May meeting, when inflation is still expected to remain quite high. If so, the rate hikes this year could be more than four," The Economist at Goldman Sachs pointed out.

Almost all economists at major investment banks continue to take a rate hike for granted at the March meeting.

Nothing is expected for this week's meeting, which should confirm the cost of money in the range between zero and 0.25%, in the face of a tapering process already begun, and also accelerated, so much so that there has been talk of turbo tapering.

Of course, since the last meeting in December a lot of things have changed, as the US Treasuries rates showed incontrovertibly that, after closing on December 31 at 1.51%, jumped last week to above the 1.90% threshold, after a Bang at the beginning of the year stronger in twenty years, caused by the fear of inflation, ergo the cruelest tax, which the data confirmed to the record since 1982.

Amie Dimon's comment on Goldman Sachs initial outlook

The same FOMC minutes had presented a decidedly more hawkish face than the Fed, and it was Goldman Sachs economists themselves who said earlier in the year that they expected four rate hikes this year, compared to three that emerged from the December FOMC dot-plot.

The prediction had been met with mistrust Byam Amie Dimon, chief executive of Morgan P Morgan who had said he would be surprised if the monetary tightening was not, in the end, more than four.

"It is possible that inflation will be worse than they expect and that (the Fed) will raise rates more than expected. Personally, I would be surprised if there were only four rate hikes, " Dimon said.

Now Goldman Sachs actually corrects the roll, not ruling out, in fact, the likelihood of more than four rate hikes.

Other economists have spoken out about what the Fed will do, in anticipation of the upcoming meeting.

Bank of America said it believed in a rate hike in March:

"We expect the first rate hike to take place in March, with an increase of 25 basis points in each of the following eight quarters. We estimate that Quantitative Tightening will be announced at the Fomc meeting in June, with the risk of an advance in May".

"Analysts at Societe Generale are less ha-Kish and believe instead that the Fed will deny market bets on more than four tight ones in 2022, as it prepares to embark on a rapid balance sheet reduction starting in the second half,"he said.

According to SocGen," although the commission is ready to fight inflation, monetary policy will remain accommodative, in the face of a gradual recovery " in the economy.

On the Fed's balance sheet reduction (i.e. Quantitative Easing) Goldman Sachs predicts that the process will begin in July, with a bond cut in the belly of the central bank that will increase by $100 billion each month, to conclude in a time frame of two years or two and a half years.

The demobilization should bring the Fed's balance sheet to a very high value, between $6.1 and $ 6.6 trillion.

According to The Economist at Goldman Sachs, the Fed will probably continue to invest part of the revenues obtained with the maturity of the bonds every month, rather than proceed with a direct demobilization of the assets.

Michael Zippo

Sources: Goldman Sachs, CNBC

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