Goldman Sachs advises investors to keep an eye on inflation figures this year as they will be the basis for whether the Fed raises rates 3-4 times in 2022 or goes further. Predictions for a fifth-rate hike are rising. Analysts predict when the Fed will start cutting its balance sheet.
This week on Wednesday, stock market investors can get more details about the Federal Reserve's planned response to rising US inflation and their timing.
The release of the minutes of the December meetings showed that in addition to the Fed's plans to accelerate the reduction in bond purchases, officials predicted three interest rate hikes in 2022, after which there could be a transition to reducing the huge liquidity balance.
As of today, traders estimate the probability of four interest rate hikes in 2022 at more than 85%, with a 95% chance of the first increase at the March meeting, according to CME Group data.
Experts at the investment bank Goldman Sachs (GS) believe that the continued acceleration of inflation may lead to the fact that the Fed will tighten monetary policy more than the market expects today.
Goldman economist David Merikle said the widespread incidence of the new Omicron strain of COVID-19 is exacerbating price increases and could push the Fed to raise rates more quickly.
Fed Chairman Jerome Powell has repeatedly cited supply chain restrictions and shortages of goods due to the pandemic as the main reasons for rising prices.
Market analysts expect consumer prices to peak in February, with significant inflationary pressure likely to last until mid-2022.
“Our baseline forecast is for four rate hikes in March, June, September and December,” Goldman economist Merikle said in a note to clients on Saturday. “But we see the risk that the FOMC (Federal Open Market Committee) wants to take some tightening action at every meeting until the inflation picture changes. This increases the likelihood of an increase or earlier announcement of balance sheet cuts in May, as well as more than four rate hikes this year.”
Expectations for a fivefold rate hike in 2022 are rising on Wall Street to a near 60% chance, according to CME FedWatch.
Goldman experts also note that in addition to rising commodity prices due to Omicron risks, and the imbalance between supply and demand, inflation may increase under the influence of continued wage growth.
Regarding the announced measures to reduce the Fed's asset balance, Goldman predicts that this process will begin in July and will be carried out monthly in increments of $100 billion. This process is expected to last 2 or 2.5 years and reduce the balance sheet to a still-elevated level. at $6.1 - $6.6 trillion. from the current $8.8 trillion.
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