VIEW: Goldman Now Look For 5 Hikes From The Fed In ’23

Goldman Sachs note that “the largest headwinds to real spending growth in 2022 are the pullback in government transfer payments and high inflation that will weigh heavily on real income growth. We forecast that real household income will only grow by 0.5% on a Q4/Q4 basis in 2022, and our distributional income and inflation estimates imply an even worse outlook for lower-income households. Additionally, rising interest rates will likely challenge durable goods spending, and low consumer sentiment will likely be a headwind to spending.”

• “The largest tailwind to spending is the ongoing recovery of virus-sensitive services spending, which should pick up going forward since consumers appear less concerned about virus risks post-Omicron. Additionally, household net worth has increased to a very high level, and many households will be able to support spending by drawing down savings.”
• “We put weight on both sets of signals, and expect that a recovering service sector and spend out of savings will keep real PCE growth positive in 2022, but that weak income growth will weigh on spending, particularly for lower-income consumers. After updating our growth impulse estimates and incorporating a smaller oil price drag and slightly larger reopening boost, we now forecast real PCE growth of +0.6%/+2.0%/+2.5%/+2.25% in Q1-Q422, implying a modest upgrade to our 2022 GDP forecast to +0.5%/+2.25%/+2.75%/+2.25% in Q1-Q4 (vs. +0.5%/+1.5%/+2.5%/+2.5% previously) and +1.9% on a Q4/Q4 basis (vs. +1.75% previously; +2.7% consensus).”
• “Based on the stronger growth outlook and the signal from last week's FOMC meeting that Fed officials are increasingly willing to raise the funds rate above their estimate of neutral, we now expect the FOMC will hike at every meeting through Q123 (vs. Q422 previously) and to only slow to a quarterly pace in Q223. We still expect seven 25bp rate hikes in 2022, but now expect five hikes in 2023 and a higher terminal rate of 3-3.25%. We continue to see meaningful risk of a 50bp hike at some point that would lead the policy rate to reach our terminal forecast sooner.”