- The Federal Reserve will carry on hiking interest rates after its February meeting, Goldman Sachs said.
- The US central bank is expected to hike by 75 basis points Thursday as it battles soaring prices.
The Federal Reserve will favor smaller interest rate hikes but shun any talk of a pivot after its November meeting, Goldman Sachs believes.
The Wall Street bank expects Jerome Powell to suggest the Fed will start raising rates at a slower pace, but for longer, when the US central bank's chief discusses its latest policy decision Thursday.
Its team of economists laid out three reasons that could drive the shift in a research note at the weekend.
"The focus will be on what comes next, and we expect Chair Powell to hint that the Federal Open Market Committee will likely slow the pace to 50 basis points in December," they said.
"We are adding another 25bp hike to our own forecast — which now calls for hikes of 75bp in November, 50bp in December, 25bp in February, and 25bp in March — and now see the funds rate peaking at 4.75-5%."
The Fed is aggressively hiking interest rates in a bid to curb inflation, which came in at 8.2% in September and has been running at red-hot 40-year highs.
It raised rates by 75 basis points at the end of its June, July, and September meetings — and most analysts expect it to bring in another outsized hike Thursday.
The Goldman Sachs team, led by chief economist Jan Hatzius, forecast the Fed will then transition to smaller rate hikes for three reasons.
First, they expect US inflation to remain "sticky" — meaning the Fed will need to keep rates edging higher to stop rising prices becoming entrenched.
"Inflation is likely to remain uncomfortably high for a while, which could make continuing to hike in small increments the path of least resistance," they said.
Second, a surging labor market and rising wages means the Fed will have to carry on its tightening campaign for longer, if it wants to curb growth in order to bring prices down.
"More rate hikes might be needed to keep the economy on a below-potential growth path now that the fiscal tightening has mostly run its course and real income is growing again," Hatzius' team said.
Last, bringing in smaller rate hikes until March will put the Fed in a better position for a future pivot. A shift to easing interest rates would likely to support economic growth and lift stocks, Goldman's team said.
"The FOMC might need to do more if a future pivot causes a premature easing of financial conditions," they said.