Goldman warns of a rate hike until inflation settles

Goldman warns of a rate hike until inflation settles
Source: REUTERS/Andrew Kelly

The backstory:

  • Inflation is running really high right now, especially in the United States. The Fed aims for around 2-3% inflation, but it has reached record-highs for the past few months.
  • Several factors are putting upward pressure on inflation, but pretty much all of them have been caused by the pandemic.
  • For example, on the supply side, the worker shortage has meant that companies are doing more to try and attract workers, including increasing pay. This has pushed up their costs, which then trickles down to consumer prices.
  • This is on top of an existing supply chain crisis, which has made it difficult for some businesses to get their hands on products and components, like chips, which puts upward pressure on prices.
  • With this, Federal Chair Jerome Powell has signaled that he will fight inflation through a rate hike. But, he has also specified in the past that the central bank works equally to achieve both full employment and price stability, but right now, the latter takes priority.

The development:

  • Powell and his team will meet this week, and people are expecting that they will signal a willingness to lift rates from near zero in March.
  • But Goldman Sachs Group, Inc. has gone against the majority to say that it thinks the Fed will be more aggressive and tighten monetary policy at every policy meeting from March.
  • More specifically, in a report to clients, it said that it currently expects interest-rate hikes in March, June, September and December and for the central bank to announce reducing their asset purchasing program, which is essentially a stimulus program introduced when the pandemic hit to help keep the economy moving and cash flowing when millions were in lockdown.
  • They think that Inflation means that the “risks are tilted somewhat to the upside of our baseline,” and there is a chance that officials will act “at every meeting until the inflation picture changes.”
  • “This raises the possibility of an additional hike or an earlier balance sheet announcement in May, and of more than four hikes this year. We could imagine a number of potential triggers for a shift to rate hikes at consecutive meetings,” the group said.

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