Goldman Sachs Group Inc. economists said they now expect inflation will force the Federal Reserve to hike interest rates next July, a year earlier than previously expected.
In a report to clients late Friday, economists led by Jan Hatzius said the Fed will raise its benchmark from a range of zero to 0.25 per cent soon after it stops tapering its massive asset-purchase program. A second increase will follow in November 2022 and the central bank will then raise rates two times a year after that, they said.
Fed Chairman Jerome Powell and colleagues are predicted to announce next week that they will start slowing their buying of assets in November or December at a pace of around $15 billion a month. While policy makers have previously been divided over whether they expect to start raising rates in 2022 or 2023, investors have stepped up bets in recent weeks that inflation will force their hand next year.
The Goldman economists said the main reason for their new forecast was they now expect inflation to prove more stubborn than they previously thought. They now expect consumer price inflation outside of food and energy costs to still be above 4 per cent when the taper ends.
“We think this will make a seamless move from tapering to rate hikes the path of least resistance,” they said in the report.
The Fed has goals for both inflation and employment. While the Fed has said it wants maximum employment before increasing rates, Hatzius and his colleagues said with inflation far above target and job availability high, officials will likely conclude most of any remaining labor force weakness is structural or voluntary.