The risk is rising that the Federal Reserve tips the US into recession by hiking interest rates hard, Goldman Sachs economists have warned.
Goldman’s economics team, led by Jan Hatzius, now expects the Fed to raise interest rates by 75 basis points this week and again by the same amount in July, following Friday’s red-hot inflation print.
US inflation rose to a 41-year high of 8.6% in year-on-year in May, that data showed, sending analysts scrambling to reassess the likely path of Fed interest rates. Month-on-month, prices across the economy surged by 1%.
By Tuesday morning, traders thought there was a 100% chance of a 75 basis point hike at the Fed’s meeting on Wednesday, according to CME Group’s FedWatch tool.Just a week ago, they thought a 50 basis point hike was all but certain.
Traders now expect the Fed to hike rates to close to 4% in 2023, causing bond yields to shoot up and stocks to tumble on Friday and Monday.
Goldman said these expectations and the resulting drops in financial markets “imply a meaningful further drag on growth that goes somewhat beyond what we think policymakers intend at this point, or should be targeting to have the best chance of bringing down inflation without a recession.”
Hatzius and colleagues said they now expect a 75 basis point hike in both June and July, to be followed by a 50 basis point hike in September and 25 basis point hikes in November and December.
Goldman’s team pointed to a Wall Street Journal article, published Monday, which said the Fed is likely to consider a 75 basis point hike this week, as evidence that the central bank’s thinking was changing. The article prompted some traders to speculate the central bank might increase rates by 100 basis points at this week’s meeting.
Goldman’s analysts expect the Fed’s target federal funds rate to peak at 3.25-3.5%, around 50 basis points below what the rest of the market expects.