The Fed may hike interest rates another 3 times this year, Goldman says - and that would dial up pressure on stocks

• The Federal Reserve could lift interest rates by another 75 basis points in total this year, Goldman Sachs says.
• The bank's chief economist suggested the Fed might raise rates at its March, May and June meetings to beat inflation.

The Federal Reserve could lift interest rates three times this year in a bid to curb inflation, according to Goldman Sachs' chief economist – and that could turn up the pressure on stocks.

Goldman's Jan Hatzius told Bloomberg he expects the Fed to raise rates by 25 basis points at its March, May and June meetings. The US central bank may be worried the economy is on the verge of growing too hot, he said.

"The recent numbers have been stronger than expected on the growth side, plus we've seen some higher inflation numbers for January," Hatzius said Tuesday.

"It reinforces the idea that the Fed still has work to do. And so we think another 75 basis points from here, with no cuts until 2024, seemed like a more likely outcome."

The US inflation rate rose 6.4% on an annualized basis in January. While price pressures have been moderating since mid-2022, the reading showed inflation still remains far above the Fed's 2% target.

Inflation has stayed stubbornly high despite the Fed's historically fast pace of hikes. It has taken rates from almost zero to nearly 5% within the past year, and it has signaled it expect to lift them even higher in the coming months.

The call by Hatzius — who also serves as head of global investment research at Goldman — marks a stark contrast to what markets expect of the Fed moving forward.

Most investors anticipate the US central bank will ease up on tight monetary policy or even start cutting interest rates this year as inflation cools. But with retail sales and payrolls surging and unemployment falling, there's a possibility the Fed may decide it has to keep ratcheting up interest rates.

Higher interest rates encourage saving over spending and make borrowing more expensive, which tends to alleviate upward pressure on prices. However, they can also sap demand, slowing economic growth and dragging down stocks and other assets.

As for the risk of a recession, Hatzius said that Goldman sees only a 25% chance of a prolonged economic downturn. The US economy is still on track for a soft landing, but risks becoming too strong and stoking further inflation, he added.

"A narrow path basically means that there's risks on both sides. The economy slows too much and falls into recession, or the economy stays too strong and inflation doesn't come down," Hatzius said.

"I still think we're on that narrow path, but right now, the risks are looking a little bit higher on the too strong side than the too weak side," he added.