Goldman Sachs Predicts Fed Will Increase Interest Rates

( Goldman Sachs has pushed forward its forecast for the first post-pandemic interest rate increase by a year to July 2022. The investment bank is also predicting that the persistently high inflation will force the Federal Reserve to more aggressively dial back its stimulus measures.

In explaining the change, Goldman’s chief economist Jan Hatzius wrote that they are now expecting core PCE inflation to remain higher than 3 percent, with core CPI inflation above 4 percent.

The Fed is expected to announce plans to start tapering the central bank’s $120 billion in monthly purchases of Treasury bonds and mortgage-backed securities at the end of their two-day policy meeting on November 3.

While the timing and pace of tapering haven’t been decided, St. Louis Fed President James Bullard told CNBC last month that he would like to wrap up the taper by the first quarter of 2022. That way, if inflation stays high or moves even higher, the central bank could raise rates “in the spring or summer if we had to do so.”

At the policy meeting in September, Federal Reserve Chairman Jerome Powell said the “substantial further progress” taper test for employment “is all but met” and that scaling back the asset buys “may soon be warranted.”

Last Friday the Commerce Department announced that the core personal consumption expenditures (PCE) inflation index, which excludes food and energy, rose in the year through September at 3.6 percent, showing that September’s rate of inflation remained stuck at its highest annual level in 30 years for the fourth month in a row.

The updated projections came as inflation has been running far hotter than the Fed’s 2 percent target. This poses a challenge for policymakers wary of pulling back support before the labor market shows sufficient recovery.

In their September meeting members of the Federal Open Market Committee predicted that the annual PCE index inflation rate for 2021 would hit 4.2 percent – a significant increase from the 3.4 percent they predicted in June. Next year’s projected inflation rate inched up to 2.2 percent from 2.1 percent. Currently, the 2023 projected rate remains unchanged at 2.2 percent.