The Federal Reserve is unlikely to pivot and cut its benchmark interest rate until 2024 at the soonest as it tries to crush the hottest inflation in four decades, according to Goldman Sachs strategists.
The bank's economists — led by Jan Hatzius — predicted in an analyst note on Monday that the U.S. central bank will raise interest rates four more times between now and the end of 2023, eventually holding them at a range between 4.25% to 4.50% until 2024.
The analyst note comes ahead of the Fed's two-day meeting this week, during which Hatzius now sees policymakers approving a third consecutive 75-basis-point interest rate increase — triple the usual size.
Goldman Sachs then predicted that the Fed will deliver back-to-back half-percentage point increases in November and December, followed by one quarter-percentage point hike in 2023 and one rate cut in 2024.
"We see several reasons for the change in plan," Hatzius wrote. "The equity market threatened to undo some of the tightening in financial conditions that the Fed had engineered, labor market strength reduced fears of overtightening at this stage, Fed officials now appear to want somewhat quicker and more consistent progress toward reversing overheating, and some might have reevaluated the short-term neutral rate."
Although Goldman economists, like many other experts, initially thought the Fed would reduce the size of rate increases after July, that changed after the August inflation data released last week came in hotter than expected. The consumer price index unexpectedly rose 0.1% in August from the previous month, dashing hopes for a slowdown. On an annual basis, prices are up 8.3% — near the highest level since 1981.
Stocks fell sharply after the surprisingly hot report on fears of an even more aggressive Fed, with the Dow sliding 1,276 points — the worst day since June 2020.
Investors are already bracing for the Fed's policy-setting meeting, which is slated to take place Sept. 20-21.
Traders are betting on officials approving another super-sized 75-basis-point rate hike — the third of its kind this year — at the conclusion of the meeting, although some on Wall Street think that central bankers could go even bigger with a full point increase.