For this year, the Federal Reserve is likely to raise interest rates four times, and it will start the process of running off its balance sheet in July, if not before.
Goldman’s Jan Hatzius said in a research note that the U.S. job market is moving quickly, and the minutes from the December 14-15 Federal Open Market Committee show that the rate of normalization will be faster.
Instead, Hatzius said, “We’re moving our runoff forecast from December to July, with more risks on the early side.” At that point, we don’t think that the start of the runoff will be enough to make us think that we should raise the interest rate every three months.” We still see hikes in March, June, and September, and we’ve added one in December.
In its December meeting minutes, the Fed hinted that it might move faster than it did the last time it tightened monetary policy in order to keep the U.S. economy from overheating with high prices and near-full jobs. It could be faster to raise interest rates because of these conditions, as well as because the Fed has a bigger balance sheet that lowers long-term borrowing costs.
Even though they had never done this before, officials thought that reducing the $8.8 trillion balance sheet would likely happen “closer to the time when the committee’s policy-rate liftoff occurred than in its previous experience.”
Wages in the United States rose last month, adding to evidence that the job market is very tight.
Goldman’s prediction for the final funds rate hasn’t changed. It’s still at 2.5 percent to 2.75 percent.
Hatzius: “Even with four hikes, our path for the funds rate is only a little above market expectations for 2022, but the gap widens in the years after.”