Seven 0.25% rate hikes expected in 2022 and five more in 2023 – Goldman Sachs

Analysts at Goldman Sachs have raised their expectations for the Fed’s monetary policy tighteningespecially after Chairman Jerome Powell said in the March decision that every meeting will be live.

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“The biggest tailwind for spending is the continued recovery of spending in the services sectorsensitive to the virus, which should rebound in the future, as consumers seem less concerned about coronavirus risks after Ómicron. In addition, household net worth has increased to a very high level, and many households will be able to support spending by drawing down savings.”

“We put weight on both sets of signals, and we expect service sector recovery and savings spending to keep real PCE growth positive in 2022, but weak income growth will weigh on spending, particularly for lower-income consumers. We update our growth momentum estimates and incorporate lower oil price drag and slightly higher reopening momentum.”

“We now forecast real PCE growth of +0.6%/+2.0%/+2.5%/+2.25% from the first to the fourth quarter of 2022, which implies a modest improvement to our 2022 GDP forecast to +0.5%/+2.25%/+2.75%/+2.25% from Q1 to Q4 2022 (vs. +0.5%/+1.5%/+2.5%/+2.5% seen previously) and +1.9% on a Q4/Q4 basis (vs. +1.75% previously; +2.7% consensus).”

“Based on the stronger growth outlook and the signal from last week’s FOMC meeting that Fed officials are increasingly willing to raise the funds rate above its estimate of neutral, we now expect the FOMC to rise at every meeting through Q1 2023 (vs. Q4 2022 seen previously) and only slow to a quarterly pace in Q2 2023. Still we expect seven 25 basis point rate hikes in 2022, but now we expect five hikes in 2023 and a higher terminal rate at 3-3.25%. We continue to see a significant risk of a 50 basis point hike at some point that would lead the policy rate to reach our terminal forecast sooner.”