HONG KONG (BLOOMBERG, REUTERS) - Goldman Sachs Group's economists now expect the Federal Reserve to raise interest rates seven times this year to contain surging United States inflation, a change from the five hikes they had seen earlier.
The change of view comes after the US consumer price index report for January showed a 7.5 per cent annual increase, the biggest since 1982. Gains were broad-based, extending beyond food and energy to categories including household furnishings and health insurance.
Economists led by Mr Jan Hatzius are tipping the Fed will move by 25 basis points at seven consecutive meetings of the Federal Open Market Committee.
While there is a case to be made for a 50 basis point hike in March given the combination of very high inflation, hot wage growth and high short-term inflation expectations, the indications from policymakers so far are pointing to more incremental moves, according to the Goldman analysts.
"Most Fed officials who have commented have opposed a 50 basis points hike in March," the Goldman analysts wrote in a note. "We therefore think that the more likely path is a longer series of 25 basis points hikes instead."
Federal Reserve Bank of St Louis president James Bullard, a voter on the Fed's rate-setting committee this year, said on Thursday (Feb 10) that he supports raising interest rates by a full percentage point by the start of July - including the first half-point hike since 2000 - in response to the hottest inflation in four decades.
"We would consider changing our forecast if other participants join him, especially if the market continues to price high odds of a 50 basis points move in March," the Goldman analysts said.
Mr Bullard in his comments said he did not think such a move would be a “shock and awe” approach but rather a “sensible response” to the unexpected inflation shock.
Some analysts, however, believe the Fed will maintain a gradual approach in tightening monetary policy despite higher-than-expected inflation.
Federal funds rate futures on Thursday boosted the chances of a half percentage point tightening by the Fed at next month's meeting after Mr Bullard's hawkish comments and the hotter-than-expected inflation data.
Rate futures showed a 62 per cent chance that the Fed will raise interest rates by 50 basis points in March, from a 30 per cent chance late on Wednesday. For the year, futures have priced in rates rising by 164 basis points.
Other metrics such as the CME FedWatch tool showed a 95 per cent probability of a 50 basis point hike in March.
The fed funds rate has been near zero since March 2020, when the Fed slashed rates to cushion the economy from the Covid-19 pandemic.