Goldman Sachs Pencils Possibility of 4 Rate Hikes in 2022

In the midst of all the hawkishness in the FED statement and the minutes of the FED, global investment powerhouse Goldman Sachs has come out with extremely hawkish estimates. They have actually pencilled 4 rate hikes by the Fed in 2022.

The high profile Jan Hatzius, chief economist of Goldman Sachs, expects the FED to implement 4 rate hikes during 2022 of 25 basis points each taking the total rate hike to 100 bps in the year. This is higher than the CME Fedwatch indication of 3 rate hikes in 2022.

Jan Hatzius has highlighted persistently high inflation and a labour market close to full employment as the key reasons. They expect the rate hikes to start as early as March this year, once the taper is completed by the FED.

The current FED rate is hovering in the lowest possible range of 0.00%-0.25% and Jan Hatzius expects that by the end of 2022, the FED rates should be standing in the range of 1.00%-1.25%. This is even more aggressive than what the FED had indicated.

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According to Jan Hatzius, Goldman Sachs sees rate hikes in March, June, September and again in December. This is more aggressive than Goldman’s original estimate of 3 rate hikes in the year. One reason is strong jobs data and higher than expected inflation which is expected to be announced this week.

The FED expects US inflation to touch a 40-year high of 7.1% for December, which would almost bring the US economy back to the Volcker years. Even the unemployment fell sharply to 3.9% while 4-5% range is normally considered to be full employment. So jobs is also not a worry any longer for the Fed.

In fact, Jan Hatzius  has gone one step further. He expects the rate hikes to start immediately after the taper is completed in March. However, he expects the Fed to walk that extra mile and also start to shrink its $8.8 trillion balance sheet in order to magnify the impact of the rate hikes.

The asset purchase program began after the financial crisis of 2008 but the unwinding started post 2012. However, post the pandemic in 2019, the US Fed had to again change tack and it actually boosted the bond book of the FED from $4 trillion to nearly $9 trillion just to combat the deleterious effects of COVID-19.

Currently, the markets are giving an 80% probability for the first rate hike to start in March 202 and a 50% probability of 4 rate hikes instead of 3 rate hikes in 2022. Interestingly, there is also a 23% probability of 5 rate hikes in year 2022, although most economists dismiss that as only a theoretical possibility. Treasury yields at above 1.8% are certainly building in a lot of hawkishness.