Goldman Sachs has adjusted its forecast for the timing of the first post-pandemic interest rate hike by the U.S. Federal Reserve to 2023, in line with the latest projection by central bank policymakers.
However, Goldman, in a daily briefing late on Wednesday, said chances the Fed will hike rates by the end of 2023 are “only modestly better than 50% because a liftoff could easily be derailed by lower-than-expected inflation or a sharper deceleration in growth as fiscal support fades.”
The investment bank said it revised its forecast for an initial rate increase to 2023’s third quarter from a previously forecast first quarter of 2024, citing the Fed’s lower inflation bar for hiking rates.
On Wednesday, a majority of Fed policymakers moved up projections for commencing interest rate hikes from 2024 to 2023, with two quarter-point interest rate increases projected that year. At the same time, the median projection for core personal consumption expenditure (PCE) inflation was steady at 2.1% in 2023.
Goldman Sachs said the Fed “appears to be more firmly focused on the backward-looking average level of inflation this cycle than we expected” and that has implications for future interest rate policy decisions.
“First, the liftoff threshold appears to be modestly lower than we previously thought, though the FOMC (Federal Open Market Committee) did maintain the liftoff requirement that inflation must be ‘on track to moderately exceed 2% for some time,’ which presumably implies that some buffer above 2% is still needed,” the briefing said.
“Second, the median projection of two hikes with core PCE at just 2.1% suggests to us that most of the FOMC would support proceeding steadily with normalization after the liftoff goals are met even if inflation is only running a bit above 2%,” it added.